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Is Divesture a Wrong Strategy for Wells Fargo Now?

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The stock price of Wells Fargo & Co. (WFC - Free Report) slipped nearly 2% following the announcement of an agreement between Wells Fargo Insurance and USI Insurance Services during the second half of the trading session on Thursday. As per the agreement, Wells Fargo Insurance – a subsidiary of Wells Fargo – will vend 42 of its regional insurance brokerage and consulting locations spread across lower and middle markets to USI Insurance Services.

The terms and conditions of the deal were not disclosed. However, it is expected to close in second-quarter 2014. Further, on completion of the deal, Wells Fargo will continue with its Insurance Brokerage and Consulting business in 55 locations across Charlotte, Dallas, Minneapolis and San Francisco.

Insurance business is a lucrative option in the U.S market with the potential for generating huge profits. Therefore, apparently the divesture may not seem appropriate but it is part of the company’s growth plan to focus on upscale markets, from which it derives the major part of its insurance revenues.

Moreover, in the present economic scenario that offers limited scope to improve the top line, Wells Fargo delivered its sixteenth consecutive earnings beat in fourth-quarter 2013 primarily on the back of aggressive cost cuts. The aforementioned strategic move will further aid Wells Fargo’s prudent expense management initiatives.

On the other hand, though the stock price movement indicates negative market response following the news release, it could be a consequence of the overall subdued market condition owing to the prevalent macroeconomic factors. However, there could be other factors as well.

Wells Fargo reported a 13% decline in fee revenues in fourth-quarter 2014. However, insurance fee income recorded an 18% increase. The disposition of profit-making units by the Insurance segment may have made analysts bearish, thereby prompting the downturn in price movement.

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

Some better-ranked regional banks include Bank of America Corp. (BAC - Free Report) , Fifth Third Bancorp (FITB - Free Report) and BB&T Corp. (BBT - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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