This Bank Stock is Attractive in the Long Term

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Wells Fargo (NYSE: WFC), Warren Buffett’s favorite bank, recently released its fourth quarter results. Earnings and revenue rose, but the net interest margin was squeezed, leading to a negative initial market reaction. What’s the key takes for investors after the fourth quarter and full year results?

A Quarter With Decent Growth

Wells Fargo’s fourth quarter experienced decent growth in both top line and bottom line. The revenue for the quarter was $21.9 billion, 7% higher than the same period last year. The net income came in at $5.1 billion, a growth of 24% compared to fourth quarter 2011. Wells Fargo saw the same high growth in the full year results. Its revenue has increased 6% to $86.1 billion. The net income was $18.9 billion, up 19% from 2011. The diluted EPS was $3.36 for 2012, a year-over-year growth of 19% compared to $2.82 in 2011. Chairman and CEO John Stumpf commented on the results:

2012 was an outstanding year for Wells Fargo. We saw the continued benefits of our diversified business model and reported record full year and fourth quarter earnings, robust deposit and solid loan growth, and strong performance across our business units. The Company’s success is due to our more than 265,000 team members who remained focused on our customers and on our vision to satisfy all of our customers’ financial needs.

Lowering Net Interest Margin

However, the net interest income decreased 2% to $10.6 billion, along with the 10 basis point declines to 3.56% in net interest margin. The main reason for the diminishing net interest margin was a spectacular growth in the deposit base of $30 billion in the quarter. Wells Fargo said that the strong growth in the deposit base accounted for around 8 basis points declines in net interest margin.

The average core deposit increased from $826.74 billion in fiscal 2011 to nearly $894 billion in 2012.  The other 5 basis points were due to the ongoing repricing of the balance sheet in the low interest rate environment. However, the decline of 13 basis points has been offset with a 3 basis points increase in fee income and periodic dividends.

Still Highest Margin and Return Among Peers

Even with the declining net interest margin, Wells Fargo is still superior to its peers, including Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JP Morgan (NYSE: JPM). Citigroup’s net interest margin was 2.85%, whereas the net interest margin of JP Morgan’s and Bank of America’s were 2.43% and 2.21%, respectively. In addition, Wells Fargo also had a better return metrics compared to the other three banks. Wells Fargo’s ROA was 1.27%, whereas JP Morgan’s ROA was only 0.78%. ROA's of Citigroup and Bank of America were the lowest among the four, at 0.38% and 0.18%, respectively.

Loans and Noninterest Income

The majority of Wells Fargo’s income in fiscal 2012 was generated from three main sources: loans ($36.5 billion), trust and investment fees ($11.89 billion), and mortgage banking ($11.64 billion). The trust and investment fee; and mortgage banking were part of non-interest income, which also enjoyed a 12% growth to $42.86 billion. The highest growth segment during the last 12 months was mortgage banking, of 49%. It was reported that Wells Fargo accounted for around a third of all mortgage origination for the past year. The increase in mortgage origination might be due to the fact that many homeowners refinanced their existing mortgages to take advantage of the low rates. At the current trading price of $34.77 per share, the total market capitalization is $183.11 billion. The market is valuing this banking giant at 30% above its book value, and 8.8x forward earnings.

Foolish Bottom Line

The lower net interest margin than the previous year was mainly due to the increase in the core deposit base, and Wells Fargo still has the highest net interest margin among mega banks. With the conservative banking practice, high return on asset, and single-digit forward earnings valuation, Wells Fargo looks attractive for the long term at the current price.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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