Less (for deposits) is more (for earnings) at Wells Fargo

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Wells Fargo & Co. depositors generally earn a lot less on their money than they could get elsewhere.

The bank’s shareholders should be very grateful: Those cheap deposits are buffering the company’s bottom line against loan losses.

San Francisco-based Wells on Wednesday reported better-than-expected second-quarter earnings and a 10% boost in the dividend on its stock.

The news -- which reinforced the view that Wells is certain to be a survivor of the current banking industry mess -- sent the company’s shares rocketing $6.72, or 33%, to $27.23. It was a bad day for short sellers who’ve been betting against the stock. They picked the wrong horse to lose.

Wells’ net income in the quarter ended June 30 fell 23% from a year earlier, to $1.75 billion, or 53 cents a share. But that beat analysts’ average estimate of 50 cents a share.

And the company portrayed itself as benefiting from its rivals’ woes. ‘We are open for business and getting lots of it,’ CEO John Stumpf said in the earnings report.

Wells is facing higher loan losses, like nearly all banks. The company last quarter recorded a $3 billion provision for credit losses, which is what pulled earnings down. Non-performing assets totaled $5.23 billion at June 30, or 1.3% of all loans, up 16% from the level just three months earlier.

Within its substantial real-estate-loan portfolio, the bank warned that the quality of its $84-billion in home-equity loans ‘continued to deteriorate as property values search for a bottom.’ And Wells has unrealized losses of $2.1 billion on its portfolio of mortgage-backed securities, up from $598 million three months ago. Those could turn into real losses if the market doesn’t improve and Wells decides to sell out.

Still, the bank has a big advantage with its core deposit base of $318 billion: The cost of holding on to that money remains relatively low, which helps to give Wells a wider profit margin on its loans than many of its rivals earn.

Wells says it benefited last quarter from its ‘disciplined deposit pricing.’ Translation: It isn’t paying much for that cash. In California, the bank’s current yield on a one-year, $25,000 certificate of deposit is just 1.6%, compared with a national average of 2.48%, according to rate-tracker Informa Research Services.

If Wells’ depositors began to look elsewhere in large numbers, that would be a problem. But given the TV images of long lines of depositors outside the branches of failed IndyMac Bank -- which was notorious for paying high yields -- it could be that many Wells customers will be content to stay just where they are.

And they might soon have more company: ‘The hysteria being spread concerning bank safety is likely to result in deposits from smaller banks moving to Wells,’ said Richard Bove, an analyst at Ladenburg Thalmann.