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On May 28, 2014, we issued an updated research report on Wells Fargo & Company (WFC - Analyst Report). This regional bank recently reported impressive first-quarter 2014 results. Results were aided by lower non-interest expenses, increased loan and deposit balances and reduced provision for credit losses, partially offset by declining mortgage banking revenues. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.

Wells Fargo reported first-quarter 2014 earnings of $1.05 per share, beating the Zacks Consensus Estimate by 8.25% and the prior-year quarter earnings by 5%. Net income was up 14% year over year to $5.6 billion.

The company exhibited a decent performance in the last four quarters as evident from its earnings history. Positive earnings surprises were posted in the last 4 quarters with an average beat of 4.43%.

Wells Fargo has implemented company-wide expense management initiatives. In addition, with the completion of the integration process and the continuation of the economic recovery, expenses are anticipated to decrease, thereby providing opportunities for future improvement in operating leverage. Notably, efficiency ratio for first-quarter 2014 was 57.9%, within the targeted efficiency ratio range of 55–59%.

Wells Fargo remains focused on managing capital levels efficiently. This is well evident from the clearance of the 2014 stress test and estimated Tier 1 common equity under Basel III increasing to 10.07% as of Mar 31, 2014, under the advanced approach. Recently, in Apr 2014, the company increased its dividend by 16.7%. Further, Wells Fargo returned $2.5 billion to shareholders through dividends and share repurchases. We anticipate such capital deployment activities to boost investors’ confidence.

Despite strong fundamentals, we believe there are certain issues that may create pressure on the company’s financials in the near term. These include absence of credible improvement in the mortgage market, declining net interest margin due to low interest rate environment and the prevailing stringent regulatory landscape.

Following the first-quarter 2014 results, the Zacks Consensus Estimate over the past 60 days increased 2.2% to $4.13 per share for 2014. Also, for 2015 it surged 1.2% to $4.33 per share, over the same time frame.

Wells Fargo currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better ranked finance stocks include Capital City Bank Group Inc. (CCBG - Snapshot Report), Midsouth Bancorp Inc. (MSL - Snapshot Report) and Middleburg Financial Corporation (MBRG - Snapshot Report). All 3 stocks carry a Zacks Rank #1 (Strong Buy).

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