We have reaffirmed our Neutral Recommendation on
Wells Fargo & Co.
) based on its fundamentals and recent acquisitions.
Wells Fargo's first quarter 2012 earnings of 75 cents per share
were 2 cents ahead of the Zacks Consensus Estimate. Results
improved both sequentially and year over year, primarily driven by
a higher top line, attributable to solid mortgage banking and
market sensitive revenues. It also reported $400 million (pre-tax)
reserve release, driven by improved portfolio performance. However,
an increase in operating expenses was on the downside.
At Wells Fargo's annual investor day event held recently,
management announced its return on assets target of 1.3% to 1.6%
and 12% to 15% return on equity, subject to economic and regulatory
environment. This is likely to support a shareholder payout ratio
of about 50% to 65%.
Notably, Wells Fargo's average return on assets between the
first quarter of 2009 and 2012 is 1.12% and average return on
equity for the same period is 10.97%. We believe its solid
fundamentals would help it in achieving its target over time.
Moreover, with a strong capability to generate organic capital,
Wells Fargo is well positioned for future attractive acquisition
opportunities. In fact, its growth plans have historically included
a large number of acquisitions, Wachovia being the largest addition
in December 2008.
Moreover, since 2011, the company has completed six transactions
which include both loan portfolio purchases as well as business
unit acquisitions. Notable among these were the purchases of BNP
Paribas North American Energy Lending, Burdale Financial Holdings
Bank of Ireland Group
) and EverKey Global Partners. These deals were completed in 2012.
Wells Fargo also made loan portfolio purchases from Irish Bank
Resolution Corp., Bank of Ireland and Allied Irish Bank in
Additionally, the company has agreed to buy San Francisco and
New York City-based Merlin Securities LLC, and the deals are
pending at this moment. The company plans to expand its operations
in international markets and augment its asset management
Wells Fargo has come out of the financial crisis well and posted
nine consecutive quarters of growth in earnings per share. Going
forward, we believe that with a diverse geographic and business mix
as well as opportunistic acquisitions, the company is well poised
to augment its top line. Its stress test clearance, subsequent
dividend hike and plan to increase share buybacks in 2012 also give
a fillip to investors' confidence.
Yet we believe the top-line headwinds will persist, given the
protracted economic recovery. Plus, a low interest rate environment
would keep its margins under pressure. Regulatory concerns and the
company's unrelenting legacy mortgage issues remain as
As a result, we believe that the risk, reward profile for Wells
Fargo is currently balanced and therefore reiterate the Neutral
recommendation on the stock.
Wells Fargo currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
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