Well Fargo: Going Farther Than Expected

By Richard Saintvilus - October 16, 2012 | Tickers: WFC | 0 Comments

• Email
• Print

In the financial sector, Wells Fargo (NYSE: WFC) has always had the distinction of being the “cleanest shirt in the dirty hamper.” While far from a glowing endorsement, this reputation has served the bank well. Not only has it cleaned up its messes from the credit crisis arguably better than anyone, but during that span, it's also created various routes for growth, while improving its risk exposure. In that regard, the stock is trading at a considerable discount, making it one of the best plays today on the market. Its recent earnings served to affirm why investors should pay closer attention.

Third quarter was better than “well”
Last week, the bank reported net income of $4.9 billion or earnings per share of $0.88 – its best performance ever in terms of profits. Not only does this represent an annual increase of 22%, but it's also a sequential improvement of 27%. To date, Wells Fargo has logged 11 consecutive quarters of profit growth. Revenues came in at $21.2 billion. While that figure fell short of analysts’ estimates of $21.47 billion, it represents annual growth of 8.2%.

The bank continues to enjoy improved returns, not only on its assets, but also on investments, which reflects solid execution and leverage. What’s more, its deposits outpaced its loans (3% vs. 2%), giving the bank the sort of liquidity it needs to generate returns from any potential investments it sees fit.

While bears might argue that it missed on its revenue estimates and posted disappointing net interest income, these issues are not unique to Wells Fargo. The entire sector has been adversely impacted by historically low long-term interest rates. On the whole, the report was solid – helped significantly not only by an impressive performance on its mortgage side, where it was able to retain almost $10 billion in first mortgages, but also by a remarkable improvement in its efficiency ratio. The latter arrived at 57.1% -- more than 1% better than the previous quarter.

Moving forward

The company’s management deserves credit for this performance – particularly as banks continue to suffer increased “stress-related” scrutiny from regulators who wants to ensure their long-term solvency. Not only are its books highly transparent, but unlike several of its peers, it's is easy to understand. It is one that if studied more closely, investors will discover how impressively unburdened it is from the various types of risks that have hurt its peers. Many of which include derivatives, investment banking, prop trading and, better still, the adversities of Europe.

The interest rate environment has certainly made it challenging for the bank. Nonetheless, Wells Fargo has an excellent business model as shown in its mortgage performance where it continues to steal share from JP Morgan Chase and Bank of America and with many more opportunities to grow. For that matter, it demonstrates an exceptional level of intrinsic customer focus, which during the quarter resulted in not only lower costs on deposits, but also loan yields in excess of the industry average.

This sort of aggressiveness in targeting more business from its depositor base continues to set Wells Fargo apart from even smaller regional rivals such as SunTrust and PNC. But Wells Fargo needs to keep up this enthusiastic pursuit to continue thriving.

Bottom line

In terms of credibility of Wells Fargo’s brand and the execution of its management, it’s hard to say at this point if a better banking franchise exists today. As a result, the bank will continue to enjoy above-average growth while consistently leveraging its book value per share over the next several years. At current levels, I would be a buyer. The stock has the potential to add premiums of 20% by year’s end placing it at $40. And over the course of the next 12-24 months, $50 should easily be attainable.

• Email
• Print
• Feedback