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Recently, Wells Fargo & Company (WFC - Analyst Report) joined U.S. mega banks like Bank of America Corporation (BAC - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report) in announcing a pay hike for its chief executive officer. Wells Fargo increased CEO John Stumpf’s salary by 15% to $22.87 million in 2012, making him the highest paid CEO of a chief U.S. commercial bank.

The package includes salary of $2.8 million, incentive award of $4 million, gains in pension of $3.5 million and stock awards of $12.5 million.

This pay hike came on the back of certain factors, including Wells Fargo’s financial performance in 2012. The company’s net income, applicable to common shareholders, climbed 19% to $18 billion last year. However, this pay rise is subject to shareholders’ approval.

Well’s Fargo has performed exceptionally well in the recent years under Stumpf, posting record earnings besides being the market leader in residential mortgage lending. Further, it performed admirably well in the stress test and the Federal Reserve has approved of the company’s 2013 capital plan under the recently concluded Comprehensive Capital Analysis and Review (CCAR) of the nation’s largest banks.

The company confirmed that its 2013 Capital Plan includes a proposed dividend rate of 30 cents per share for the second quarter of 2013, a hike of 20% from the current dividend of 25 cents. Further the company’s capital plan includes a proposed boost to the share buyback activity for 2013 compared with 2012.

Earlier in January, the company increased its dividend by 14%, under the capital plan of 2012. The clearance of the stress test and subsequent dividend hike as well as the strategy to increase share buybacks will boost investors’ confidence.

These bear testimony to the fact that the company is performing well under the reign of the present CEO and that the pay-package is well-deserved.

We believe that over the long-term Wells Fargo will remain comfortably positioned to benefit from a recovering economy, given its diverse geographic mix. Further, strategic acquisitions will likely help the company expand its business and improve profitability. Solid capital levels, prudent expense management as well as expected improvement in credit quality though at a slower pace, will support Wells Fargo’s profit figures.

Yet, we believe that the top-line headwinds would persist, given the protracted economic recovery. In addition, a low interest rate environment would keep its margins under pressure. Wells Fargo’s unrelenting legacy mortgage issues also remain a concern. With stringent banking regulations, there will be pressure on fees and loan growth could remain feeble.

Wells Fargo currently retains a Zacks Rank #3 (Hold). Among other major banks that are performing well include BankUnited, Inc. (BKU - Analyst Report), which carries a Zacks Rank #2 (Buy).

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