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Balanced View on Wells Fargo

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On Mar 6, 2013, we reiterated our long-term recommendation on Wells Fargo & Company (WFC - Free Report) at Neutral based on its diverse geographic and business mix. Moreover, the company’s strategic acquisitions and solid capital position are expected to improve profitability going forward. However, a protracted economic recovery and pressure on net interest margin remain concerns.

Why Neutral?

Wells Fargo has achieved its 12th consecutive quarter of growth in earnings per share by reporting earnings of 92 cents per share in fourth quarter 2012. Results improved from earnings per share of 88 cents in the prior quarter and 73 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.

Results at Wells Fargo benefited from improvement in top line, aided by rise in all segments’ revenue. It also reported $250 million in reserve release (pre-tax), attributable to improved portfolio performance.

However, the company experienced a rise in non-interest expenses. Non-interest expense was $12.9 billion, up 6.6% from the prior quarter. Further, regulatory issues as well as increasing demand for mortgage buybacks added to its woes.

On Jan 22, 2013, Wells Fargo enhanced its quarterly common stock dividend by 14% to 25 cents per share. The dividend was paid on Mar 1, 2013 to shareholders of record as of Feb 1, 2013. This marks Wells Fargo’s 3rd consecutive year of dividend increase, reflecting its commitment to return value to shareholders with strong cash generation capabilities.

Following fourth-quarter 2012 results, the Zacks Consensus Estimate for 2013 and 2014 has remained stable at $3.60 and $3.87 per share, respectively, over the last 60 days. With the Zacks Consensus Estimates remaining constant, the company retains a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Among peers, BankUnited Inc. (BKU - Free Report) holds a Zacks Rank #1 (Strong Buy), while Fifth Third Bancorp (FITB - Free Report) and State Street Corporation (STT - Free Report) retain a Zacks Rank #2 (Buy).

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