Wells Fargo earnings: Good but not great

January 11, 2013, 6:44 PM UTC

FORTUNE — Wells Fargo is flashing the yellow light for bank stocks.

In the first test of whether the banking recovery continued during the fourth quarter, Wells (WFC) said its earnings and sales were better in the last three months of 2012 than expected. But shares were down 1.6% to a recent $34.81 shortly after the market opened on Friday as investors focused more on some of the troublesome signs in the report.

The San Francisco-based bank earned $5 billion, or 91 cents a share, up 24% from a year ago. For the whole year, Wells earned $18.9 billion, which was up 19% form 2011.

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The bank said that it has submitted its capital plan to the Federal Reserve as part of the central bank’s annual stress tests. Executives said as part of its submission it asked the Fed for permission to boost dividends and share buybacks, a sign that executives at the bank think positive earnings will continue.

Surprisingly, in a conference call with analysts, the bank said that fears of the fiscal cliff actually boosted lending in the fourth quarter, particularly at the end of the year, as individuals took advantage of the expiration of lower tax rates. Many had expected the fiscal cliff – the mix of massive tax increases and spending cuts that were set to go into place Jan. 1st but was avoided by a deal in Washington – and the possibility that it could lead to a recession, to slow the economy in the fourth quarter.

“2012 was an outstanding year for Wells Fargo,” said CEO John Stumpf in a statement released by the bank. “This time last year, I said we would benefit from the many opportunities we saw for 2012, and we did just that.”

Wells is the first bank to report its earnings for the fourth quarter. Bank stocks have been one of the market’s best performers lately. As a whole the group outperformed the rest of the market in 2012 for the first time since the financial crisis.But falling profit margins and a weak economy have some wondering how long that can continue. A recent rise in interest rates could mean that the refinance boom, which has been fueling bank profits for much of the past year, might come to an end.

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Indeed, the bank’s mortgage business provided a key view into the current profit murkiness at the banks. Home lending was once again a key driver of profits. In general, lending was stronger than usual. And Wells said it booked nearly $300 million selling loans that it had made to the government-backed insurance giants Fannie Mae and Freddie Mac.

Nonetheless, there were signs that the recent refi boom might be coming to an end. Mortgage lending slowed in the fourth quarter for the first time in over a year, down $14 billion. Applications, which peaked in the second quarter of last year at $200 billion, came in at $150 billion. Executives mostly attributed the drop to the fact that fewer people tend to go looking for mortgages at the end of the year. But that didn’t stop the bank’s mortgage lending from jumping $31 billion in the same quarter a year ago.

In all, the bank’s revenues were up only 7% in the quarter — much less than its earnings. Loans were up $17 billion during the quarter, but that was much less than the $30 billion in new deposits the bank took in during the quarter. That could be a sign the bank is still struggling to find companies and individuals to lend to. All banks have been flooded by a wave of deposits, which has increased costs.

Investors won’t have to wait long to find out how the other big financial firms fared in the fourth quarter. Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) all report earnings next week. And in a surprise move, credit card giant American Express (AXP) announced results earlier than expected on Thursday afternoon. Earnings topped forecasts, but AmEx is laying off 5,400 workers.