Is Now the Best Time to be Bullish on Wells Fargo?
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When it comes to US Money center banks, Wells Fargo (NYSE: WFC) is the cream of the crop. The San Francisco based company has a market cap of $175 billion which makes it the largest bank in the US in terms of market capitalization. Wells Fargo ranks fourth in terms of assets with $1.31 trillion in total assets.
Wells Fargo has reached the pinnacle in terms of market capitalization because it has been able to maintain its revenues and grow its earnings. The bank's earnings have increased in each of the last eight quarters over an economic climate in which its competitors have been struggling. Over the last 52 weeks, Wells Fargo is the only bank amongst the top six banks in terms of market cap that has seen its stock price move higher.
On March 13th Well Fargo reported first quarter earnings. The company had diluted earnings per share of $0.75 which beat earnings estimates of $0.72. The $0.75 figure was an increase of 12% from the first quarter of 2011. This was the banks ninth straight quarter of earnings per share growth. First quarter revenues were $21.6 billion which was a 6% increase from the first quarter of 2011. First quarter net income was $4 billion which was up by 13% from the first quarter of 2011. What was particularly impressive about the banks first quarter was that it was able to increase revenues, a feat that has been difficult for most of its competitors. The bank has increased revenues in each of the last three quarters.
Valuation
Wells Fargo’s stock trades at a higher valuation (price to earnings ratio 11.38/price to book ratio 1.3) than any of its competitors except for US Bancorp. Investors have been willing to pay more for Wells Fargo because, the bank has consistently increased earnings. The bank increased net income in each of the last four years by a total of 507%. The banks earnings per share have increased in each of the last three years by a total of 302%. Investors also value the fact that the bank has an AA- credit rating, which is higher than any of its competitors. An AA- credit rating is defined as a “Very strong capacity to meet financial commitments.” In addition the bank is the highest quality subprime lender in existence. The banks high quality loan requirements spared it from the outsized losses that many other banks had as a result of the subprime mortgage crisis.
Stock Performance
Wells Fargo’s stock has reflected its strong earnings and has outperformed its competitors. Since January 1st Wells Fargo stock price is up by 25%, while Bank of America’s (NYSE: BAC) stock price is up by 44% and Goldman Sachs stock price is up by 21%.
Efficiency
Wells Fargo is more efficient than its competitors.
“Wells originates one in four U.S. mortgages and services one in six, yet its efficiency ratio—the cost required to generate a dollar of revenue—is unrivaled at 56% and compares with 66% for both JPMorgan and Citi, and 86% for Bank of America.” Wells Fargo is also outperforming the industry average for revenue growth, with a three-year average of 24.6%, compared with the industry average of 11.2%. In addition Wells Fargo’s return on assets ratio 1.3 and return on equity ratio12.14 exceeds industry averages and are higher than all of its competitors except for U S Bancorp. Finally Wells Fargo has less exposure than its competitors to the financial problems of Europe. Wells Fargo’s “Foreign loans are a mere 5% of its portfolio.”
Stress Test
Wells Fargo passed the Federal Reserve’s Stress Test with flying colors. “The Federal Reserve’s stress test scenario applied a series of very conservative assumptions to validate the industry’s ability to perform and maintain adequate capital in the event of unlikely, dire circumstances,” On March 13th after the news was leaked that Wells Fargo had passed the Federal Reserve’s Stress Test, the bank promptly announced that it would increase its dividend payment by 83% to $0.22 per share. The bank also announced that it had “won approval to increase its share repurchases this year and to redeem certain trust-preferred securities, according to its statement. The bank didn’t say how many shares it would repurchase.”
Wells Fargo Pros
Wells Fargo is by far America’s largest residential-home mortgage originator. It has a high quality loan portfolio and took only a $1.9 billion loan loss write off in the first quarter of 2012. In addition Wells Fargo has consistently grown earnings. The bank increased its revenues in each of the last two quarters and increased its net income in each of the last eight quarters.
Well Fargo Cons
Wells Fargo is dealing with possible fraud allegations brought by the Securities and Exchange Commission, related to the bank's sale of nearly $60 billion in mortgage-backed securities from 2006 to 2008. The bank also is also defending itself against a class action lawsuit brought by institutional investors, alleging Wells Fargo misrepresented a risky securities-lending program as safe. In addition Wells Fargo has considerable exposure to the volatile real estate mortgage market.
Conclusion
In the first quarter of 2012 stocks in the banking sector have seen a tremendous rally, and I believe that some banking stocks will continue to move higher. My top pick in the banking sector is Wells Fargo. I believe that Wells Fargo’s improving earnings, relatively low risk mortgage portfolio, and competitive dividend ($0.88 with a 2.7% yield) make it a more attractive investment than any of its competitors.
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