We have reiterated our Neutral recommendation on the shares of Wells Fargo & Co. (WFC). The decision comes following a detailed analysis of the company’s fundamentals, the pace of the Wachovia integration, its decision to acquire substantially all of the U.S.-based operating assets of Foreign Currency Exchange Corporation, a wholly owned subsidiary of the Bank of Ireland Group (IRE) and the current economic environment.
First Quarter Results
Wells Fargo’s first quarter 2011 earnings of 67 cents per share came just in line with the Zacks Consensus Estimate. Results, however, significantly surpassed earnings of 45 cents in the year-ago quarter and 61 cents per share in the prior quarter.
Quarterly results reflect a decent reserve release and a decrease in expenses. However, the positives were offset by lower-than-expected revenues resulting from declines in both interest and non-interest income.
Capital ratios are strong, and the dividend and share buyback initiatives inspire investors’ confidence in the stock. Moreover, considering the current economic environment, the recent trend in credit metrics and the efforts taken by the company to improve its credit quality, we expect additional reserve releases in the upcoming quarters.
Management continues to focus on opportunities for further cost decreases through efforts implemented on a company-wide basis. In addition to this, with the conclusion of the integration process and continued economic recovery, expenses are likely to decrease, thereby providing opportunities for future growth in earnings.
Acquisitions
Wells Fargo’s growth plans have historically included a large number of acquisitions, with that of Wachovia in 2008 being the largest so far. The company also announced in May that it will acquire substantially all of the U.S.-based operating assets of Foreign Currency Exchange Corporation, a wholly owned subsidiary of the Bank of Ireland Group in an effort to expand its international banking capabilities.
The deal is expected to substantially strengthen Wells Fargo’s foreign currency exchange capabilities for domestic correspondent banks.
Wachovia Integration Update
Wells Fargo is right on track with its integration of Wachovia. The company has completed the conversion of Wachovia Community Banking Operations in 363 stores in Florida. This included Wachovia banking locations across north and central Florida and the greater Tampa. Wells Fargo will convert the Wachovia banking locations in the southern half of Florida to Wells Fargo stores in July.
Last month, Wells Fargo announced that it will complete the transition of the remaining Wachovia signs and systems by mid October. Specifically, Wachovia stores at Virginia will be converted in August, those at Maryland, South Carolina, and Washington, D.C. in September and finally the ones at North Carolina will come under the Wells Fargo wing in October.
Looking forward, the merger with Wachovia offers significant potential for growth and above-average profitability in the longer term.
Yet…
Revenue growth remains challenged at Wells Fargo. Going forward, we believe the top-line headwinds would persist given the protracted economic recovery, with lackluster loan growth and legacy mortgage issues.
Regulatory issues also seem to cap the company’s fee income growth prospects. Management now estimates a $325 million after-tax quarterly adverse impact from the Durbin amendment without offsets, up from its prior guidance of $250 million. This is from higher debit card transaction volume that its consumer and small business customers are generating.
Hence, risk-reward seems balanced for the stock and the Neutral recommendation is retained. Additionally, shares of Wells Fargo currently retain the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
IRELAND BK-ADR (IRE): Free Stock Analysis Report
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