We have reaffirmed our Neutral recommendation on Wells Fargo & Company ( WFC ) following a detailed analysis of the company's fundamentals in light of the current economic and regulatory environment.
Wells Fargo's fourth quarter 2011 earnings of 73 cents per share were a penny ahead of the Zacks Consensus Estimate. Results improved from earnings per share of 72 cents in the prior quarter and 61 cents in the year-ago quarter.
Wells Fargo's results were driven by higher top line, and improved credit quality along with strong capital ratios during the reported quarter. However, increased operating expenses were the downside.
Going forward, we believe that strategic acquisitions will expand Wells Fargo's business and improve its profitability. The company's solid business model, strong capital position and expanded business through the Wachovia acquisition along with its integration, expected expense management as well as improved credit quality will also support its profit figures. Yet, a sluggish economic recovery in addition to regulatory issues might limit its growth to some extent.
Therefore, the risk-reward profile for Wells Fargo seems balanced and we reiterate our Neutral recommendation on the stock.
Notably, Wells Fargo and other the major U.S. banks such as Bank of America Corp. ( BAC ), Citigroup Inc. ( C ), JPMorgan Chase & Co. ( JPM ) and U.S. Bancorp ( USB ) have already submitted their capital plans for the stress test and are awaiting results. They need to demonstrate adequate capital to address potential losses over the next two years under several stressful scenarios.
Wells Fargo currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.