Wells Fargo & Co on Tuesday beat Wall Street estimates with a 20 percent increase in fourth-quarter profit, boosted by continued loan growth and improving credit quality.

The improvement at the fourth-largest U.S. bank contrasted with an 11 percent decline in profit at Citigroup Inc, which saw its capital markets business battered by the European debt crisis.

Wells Fargo has a better business model for the environment we're in now because commercial lending is their biggest sector, said Jeffrey Sica, president of SICA Wealth Management in Morristown, New Jersey, which is generally negative on the banking sector.

They're not overly involved in the trading activities that the other banks are involved in.

The San Francisco-based bank said it earned 73 cents per share. The average estimate from analysts was 72 cents per share, according to Thomson Reuters I/B/E/S.

Reflecting a trend demonstrated on Friday by results at JPMorgan Chase & Co, Wells Fargo's total loans grew about $9.5 billion from the end of September to $769.6 billion at the end of December.

The bank said planned run-off of discontinued loans was more than offset by growth in a broad range of loan types, especially commercial loans. Core loans increased by about 2 percent from the previous quarter, although analysts noted the growth included U.S. commercial real estate loans purchased from struggling European banks.

In addition to the organic growth, we saw an opportunity from the acquisition standpoint, said Chief Financial Officer Tim Sloan in an interview. Not everybody in the industry has the capacity (to do that).

One area where Sloan said the bank wasn't seeing much growth was utilization of existing credit lines, typically an event that occurs as the economy rebounds. The economy is definitely improving but not as fast as everyone would like, he said.

Net income applicable to common shareholders in the fourth quarter was $3.89 billion, compared with $3.23 billion, or 61 cents per share, a year earlier. For all of 2011, Wells posted net income applicable to common shareholders of about $15 billion, up from $11.6 billion in 2010.

The report came the same day that Citigroup Inc posted net income of $1.16 billion, or 38 cents per share, down from $1.31 billion, or 43 cents per share, a year earlier. JPMorgan on Friday reported fourth-quarter net income of $3.72 billion, or 90 cents a share, down from $4.83 billion, or $1.12 a share, a year earlier.

Wells Fargo shares climbed 1.5 percent to $30.06 in afternoon trading, while Citigroup's fell 6.7 percent to $28.67.


For a graphic on Citigroup vs. Wells Fargo results: http://link.reuters.com/kyw95s

For a graphic on largest U.S. brokerage firms: http://link.reuters.com/bun95s


Wells Fargo, which became a coast-to-coast bank with its 2008 purchase of Wachovia, also benefited from improving credit quality in the quarter. For the seventh straight quarter the bank reversed reserves the bank had previously booked for bad loans.

The so-called reserve release in the fourth quarter was about $600 million, down from $800 million in the third quarter. The bank expects that to continue in 2012 absent significant credit deterioration in the economy.

Still, big banks are struggling to pad revenues at a time when low interest rates make it difficult to earn money from loans and as new regulations curb fees they can charge for debit card use.

Wells reported total revenue of $20.6 billion, down from $21.5 billion a year ago but up from $19.6 billion in the third quarter. The bank said debit card interchange fees were down by $365 million, although that dip was partially offset by growth in credit card fees.

Mortgage banking income increased to $2.4 billion in the fourth quarter, up from $1.8 billion in the third, but down from $2.8 billion a year ago, as the bank benefited from an increase in home loan refinancings. Wells is the largest originator of home loans in the U.S.

The bank also posted a $430 million gain from trading activities, an improvement from a $442 million loss in the third quarter but down about $100 million from a year ago.

Sloan said capital markets were more robust in the fourth quarter than in a volatile third quarter but may never return to the levels seen in the first half of 2008.

That's OK from our perspective, he said. This is a portion of our business. It's not the primary driver for the business, which is the challenge for others because we have a more diversified model.

The bank said its U.S. investment banking market share increased to 5.1 percent in 2011 from 4.2 percent in 2010, citing Dealogic fee-based tables.


In a bid to improve overall profits, Wells Fargo, like other banks, has launched a wide-ranging efficiency program called Project Compass.

Wells said fourth-quarter noninterest expense was up from the third-quarter as expected on higher seasonal expenses and mortgage-related costs. But the bank reiterated its goal of reducing quarterly expenses to about $11 billion by the end of this year, a reduction of about $1.5 billion.

The bank's total employment of 264,200 was down about 8,000 from a year ago but up slightly from the third quarter. Sloan said the bank eliminated employees involved in the Wachovia merger integration last year but added employees in the mortgage business to meet rising demand in the past two quarters.

Marty Mosby, bank analyst with Guggenheim Partners, said Wells Fargo showed continued progress in the quarter but was disappointing on expenses. We were looking for greater efficiency, he said.

Like other big banks, Wells submitted a capital plan this month to the Federal Reserve as part of stress tests designed to determine if banks have enough capital in case of a severe economic downturn.

Sloan did not provide specifics on Wells Fargo's plan, but said he expects the Fed will not object to the bank's submission, allowing it to increase its dividend and buy back more of its stock. The Fed's response is expected in mid-March.

During the fourth quarter, Wells said it purchased 27 million shares of its common stock. It also agreed to buy another 6 million shares in a transaction that will settle in the first quarter of this year.

As European banks work to meet their own capital requirements, some are looking to sell off loan portfolios and business units. Wells reportedly was one of the banks interested in buying the Royal Bank of Scotland Group Plc aircraft leasing unit acquired Tuesday by Sumitomo Mitsui Financial Group.

In a conference call with analysts, Wells Fargo Chief Executive Officer John Stumpf said the bank is kicking a lot of tires but will be cautious about doing any deals.

It would have to make a lot of sense for us, he said, and if all we get out of this is sore toes, that is fine.

(Reporting By Rick Rothacker in Charlotte, North Carolina; Additional reporting by Lauren Tara LaCapra and Jed Horowitz in New York; editing by Dave Zimmerman)