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Wells Fargo Investor Payoff Requires Warren Buffett-Like Patience

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Wells Fargo's (NYSE:WFC) largest shareholder -- Warren Buffett -- has seen his investment in the bank recover to pre-crisis levels on steady gains posted by the nation's top mortgage lender.

Investors should take note of that fact in the wake of the bank's record fourth-quarter earnings, which raised near-term profit questions.

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Generally, today's earnings show why Wells Fargo remains a best-in-class bank that has earned Buffett's long term investing imprimatur. All three of Wells Fargo's businesses -- community banking, wholesale banking, and wealth management -- grew profits from quarter-ago and year-ago levels.

Those looking for a short-term trade, however, might have been disappointed. Expect Wells Fargo's fundamental growth to be at the head of the banking sector in 2013, even if near-term earnings issues prove a concern to some.

Wells Fargo reported better than expected revenue of $21.9 billion and profitability of $5.1 billion, signaling that the bank's steady share performance remains on track heading into 2013.

Meanwhile, the bank's 20% 2012 earnings per share growth reflected impressive growth and a strengthening position to the recovering US housing market. Wells Fargo is also increasingly returning capital to investors, boosting buybacks by a total of 48 million shares.

Still, worse-than-expected interest-based earnings continue to cloud Wells Fargo's short-term share performance in the New Year.

Wells Fargo reported its net interest margin -- the difference between what it earns on loans and what it pays to fund them -- fell a greater-than-expected 10 basis points while expenses also increased. On the positive side, core loans grew $47.7 billion and the bank's improving loan quality drove a $250 million reserve release.

Marty Mosby, a large-cap banking analyst with Guggenheim Partners, said in an interview prior to earnings that any reported net interest margin decline of less than 5 basis points and loan growth sequentially from the third quarter would be taken positively by investors.

Wells Fargo impressed on one of those fronts, while a greater than expected NIM decline meant overall interest-earnings for the bank fell $249 million to $10.6 billion.

The earnings give a crucial insight for investors into the term trends driving Wells Fargo's profitability and growth given the bank's top footing in the housing market, healthy balance sheet and industry leading dividend payout.

Investors and banking sector analysts are watching interest margins and loan growth as a key proxy for the impact of a third round of Federal Reserve easing announced in September and insight into the strength of the housing market.

A stabilization of Wells Fargo's interest margins after a 25 basis point drop in the third quarter would have removed the bank's biggest near-term earnings risk, freeing investors to focus on longer-term trends, according to Mosby.

"The market right now is discounting Wells Fargo's earnings power because they think it is going to be lost because of significant compression of net interest margin," said Mosby.

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