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Wells Fargo Reiterated at Neutral

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On May 27, 2013, we reiterated our long-term recommendation on Wells Fargo & Company (WFC - Free Report) at Neutral, based on its well-managed global franchise, 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 thirteenth consecutive quarter of growth in earnings per share by reporting earnings of 92 cents per share in first-quarter 2013. Results improved from earnings per share of 91 cents in the prior quarter and 75 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 the positives. It also reported $200 million in reserve release (pre-tax), attributable to improved portfolio performance.

Moreover, following the Federal Reserve’s approval for the capital plan during the quarter, in Apr 2013, Wells Fargo increased its quarterly common stock dividend by 20% to 30 cents per share.

However, a fall in the top line acted as a headwind for the first quarter. The quarter’s total revenue came in at $21.3 billion, lagging the Zacks Consensus Estimate of $21.4 billion. Revenues also declined 2.7% sequentially and 1.4% year over year.

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

Following first-quarter 2013 results, the Zacks Consensus Estimate for 2013 increased 2.2% to $3.68 per share as 14 out of 22 estimates were revised higher over the last 60 days. For 2014, the Zacks Consensus Estimate remained stable at $3.88 per share. Hence, Wells Fargo carries a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Some banks that are worth considering include Fifth Third Bancorp (FITB - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) with a Zacks Rank #2 (Buy), while Bank of America Corporation (BAC - Free Report) carries a Zacks Rank #3.

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