Why Were Wells Fargo's Earnings So Unsurprising?

Today, Wells Fargo reported a $2.4 billion profit in the first-quarter. That sounds pretty good -- the bank's earnings also beat analyst estimates by 3 cents-per-share, or 7%. Yet, in the context of other banks far exceeding what the market anticipated, 7% isn't much. Why didn't Wells surprise analysts?

Part of Wells' merely adequate performance was its high consumer credit-related charge-offs. The bank set aside $5.3 billion to deal with those losses. But Citigroup's first quarter losses from bad loans were a whopping $8.4 billion -- and the bank still out earned Wells by nearly $2 billion. So credit losses are likely only a small part of the story.

A bigger reason is likely that Wells isn't much of an investment bank. Other big banks like Goldman Sachs, Morgan Stanely, Citigroup, JPMorgan and Bank of America all have strong investment banking divisions. Much of their success was due to trading profits. All of those listed had at least $4 billion of revenue from this source, but Wells had a paltry $537 million.

The follow chart demonstrates this point:

banks Q1 earnings 2010-04-21.PNG

As you can see, all of these big banks except for Wells had very strong trading profits and soundly beat expectations -- by at least 17%. Analysts likely underestimated how much revenue would be generated by trading in the first quarter. For Wells, that wasn't a very significant factor, so the market's expectation was pretty close.