Wells Fargo shares rise on stress test hope

A U.S. flag flies above Wells Fargo & Co headquarters in San Francisco, California, April 22, 2009.

NEW YORK (Reuters) - Wells Fargo & Co's (WFC.N) shares rose more than 8 percent on Thursday on hopes the fourth-largest U.S. bank will pass the Treasury's stress test, and one day after reporting record earnings.

"The market is reacting to a belief that (the stress tests) will make the stronger banks stand out", said Robert Lutts, president and chief investment officer of Cabot Money Management.

Lutts said Wells Fargo could be among the winners of the government's stress tests, examinations of 19 big banks to see if they need additional capital to handle a deep recession. Results are due May 4.

Wells Fargo shares rose 7.87 percent to $19.60 in afternoon trading on the New York Stock Exchange, while the KBW Bank Index .BKX of large lenders was up 0.31 percent. The bank's stock has lost one-third of its value in 2009 amid fears of writedowns and bad loans.

In addition, RBC Capital Markets raised Wells Fargo's price target to $21 from $14 and increased its earnings estimate for 2009 to $1.60 a share from $1.40, after stronger than expected first-quarter earnings.

"Operating trends were generally solid, highlighted by a better-than-expected margin, higher deposits and very strong mortgage banking," RBC said.

Wells Fargo reported on Wednesday a record first-quarter profit of $3.05 billion as a surge in mortgage refinancings helped it displace Bank of America Corp (BAC.N) as the nation's largest home lender.

Larger rivals Bank of America, JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) have also posted better-than-expected quarterly results, though lenders have been bolstered by trading gains and accounting changes that may not recur.

(Reporting by Juan Lagorio, editing by Steve Orlofsky)