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Wells Fargo Stock Gets Lift From Earnings

By , Money Morning •

Wells Fargo stock (NYSE: WFC) rose in early trading behind a strong earnings report.

The company reported earnings of $4.6 billion or $0.82 per share. This slightly beat analysts' expectations for earnings of $0.81 per share.

Wells Fargo posted a 17% rise in its profits from $0.70 a year ago, marking the fourth consecutive quarter in which the company has posted rising profits.

Unfortunately for Wells, the earnings report comes at a bad time.

A discriminatory lending scandal was reported yesterday and that is keeping Wells Fargo stock from experiencing better gains than rival JPMorgan Chase (NYSE: JPM) today. The scandal involved Wells discriminating against African-American and Hispanic families who were forced into costlier subprime loans than comparable white families.

"If you were African-American or Latino, you were more likely to be placed in a subprime loan or pay more for your mortgage loan, even though you were qualified and deserved better treatment," Assistant Attorney General Thomas Perez said in prepared remarks Thursday.

Wells Fargo denied the matter and will settle the issue to avoid contested litigation. The San Francisco-based company will pay a total of $175 million: $125 million in compensation to victims of discrimination and $50 million in down-payment assistance to borrowers in affected communities.

Wells Fargo Mortgage Dominance

Wells Fargo owes its rise in profits to its booming mortgage business.

It is now the largest bank in terms of market cap and is less exposed to global economic uncertainties because of its focus on U.S. mortgages.

Wells Fargo's position in mortgages has grown significantly since the housing market collapsed in 2008, while the mortgage business of other banks, such as Bank of America (NYSE: BAC), has dwindled due to worthless mortgage portfolios.

During the first quarter of 2012 Wells Fargo initiated $130 billion worth of home loans, or 33.9% of all loans handed out in the quarter. That's more than three times its closest competitor, JP Morgan, which accounted for 10.6% of U.S. home loans.

Wells Fargo Stock Continues to Roll

Wells Fargo stock has done well since it began its mortgage push, rising from its low of $8.61 in March of 2009 to its current price near $34, an almost four-fold increase.

Most stocks have bounced back from 2009 lows, but when you look at Wells Fargo's biggest competitors, such as JP Morgan and Bank of America, they have not rebounded as well.

JP Morgan hit a low just under $16 and currently trades almost even with Wells. Bank of America reached a low of $3.15 and has only managed to inch back up to $7.60, well off its pre-recession levels.

What might be even more impressive is that Wells Fargo stock is up over 20% in the past twelve months while its biggest competitors − Bank of America, JP Morgan and Citigroup (NYSE: C) − have lost 25%, 12% and 35% respectively.

Wells Fargo got some strong vocal support today from Warren Buffett, whose Berkshire Hathaway is the largest shareholder of WFC. Buffett declared that he likes Wells better than JP Morgan and that Wells Fargo should strive for a $1 trillion mortgage business.

Wells Fargo stock is up over 2% in early trading.

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