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On Aug 28, 2013, we maintained our long-term recommendation on Wells Fargo & Company (WFC - Analyst Report) at Neutral, based on its diverse geographic and business mix, strong capital base and cost saving initiatives. However, regulatory issues coupled with fundamental pressures on the banking sector are expected to dent Wells Fargo’s financials in the upcoming quarters.

Why Neutral?

Wells Fargo achieved the fourteenth consecutive quarter of growth in earnings per share by reporting earnings of 98 cents per share in second-quarter 2013. Results improved from earnings per share of 92 cents in the prior quarter and 82 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a nickel.

Results at Wells Fargo reflected growth in total loans and deposits amid a challenging economy and prudent expense management. Moreover, a strong capital position and returns on assets and equity acted as positives. It also reported $500 million in reserve release (pre-tax), attributable to improved credit performance.

However, a fall in non-interest income acted as a headwind for the second quarter. The quarter’s non-interest income came in at $10.6 billion, down slightly on a sequential basis. Reduced trading income including lower deferred compensation gains and dip in other income were on the downsides.

Though the U.S. economy posted stable to improving economic data during the first half of 2013, including favorable developments in unemployment and housing, concerns about the outlook on the global economy and continued political uncertainty persist.

Following second-quarter 2013 results, the Zacks Consensus Estimate for 2013 increased 3.8% to $3.84 per share as all 21 estimates were revised higher over the last 60 days. For 2014, the Zacks Consensus Estimate jumped 3.1% to $4.01 per share, as 18 of the 21 estimates moved north. Hence, Wells Fargo carries a Zacks Rank #2 (Buy).

Other Major Banks to Consider

Besides Wells Fargo, other banks that are worth considering include BankUnited, Inc. (BKU - Analyst Report) with a Zacks Rank #1 (Strong Buy), while Fifth Third Bancorp (FITB - Analyst Report) and The PNC Financial Services Group, Inc. (PNC - Analyst Report) carry a Zacks Rank #2.

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