We have reaffirmed our Neutral recommendation on Wells Fargo & Company (WFC) following a detailed analysis of its second quarter 2011 earnings results in light of the current economic environment.
Wells Fargo’s second quarter 2011 earnings of 70 cents per share were a penny ahead of the Zacks Consensus Estimate. Results also improved from earnings per share of 67 cents in the prior quarter and 55 cents in the year-ago quarter. Quarterly results reflected a decent reserve release and a decrease in expenses.
The quarter’s revenue stood at $20.4 billion, in line with the Zacks Consensus Estimate and up 0.3% sequentially. On a sequential basis, Wells Fargo’s corporate banking, commercial real estate, debit card, insurance, international, merchant services, retirement services and SBA lending reported revenue growth.
The Wachovia merger integration remains on track as well. Strategic acquisitions have been part of Wells Fargo’s endeavor to strengthen its business model, expand its capabilities and diversify its footprint. This has been the driving force behind its growth in recent years. With cross-selling as its key strength, Wells Fargo’s diverse geographic and business mix provides a solid leverage for consistent earnings growth.
The company’s expense reduction efforts and funding costs are encouraging. Capital ratios are also strong, and the dividend as well as share buyback initiatives give a fillip to investors’ confidence.
Yet, we believe the top-line headwinds would persist given the protracted economic recovery. Besides, a low interest rate environment and a soft loan demand would keep its margin under pressure.
Regulatory issues also seem to cap the company’s fee income growth prospects. Considering the final Federal Reserve rules regarding debit interchange fees, management now estimates the impact on the earnings to be approximately $250 million quarterly after tax before any offset starting in the fourth quarter of 2011.
Therefore, economic headwinds, coupled with regulatory issues, will expectedly keep the stock range bound.
Hence, the risk and reward profile seems somewhat balanced for Wells Fargo, and we reiterate our Neutral recommendation on the company.
Wells Fargo shares are also maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Also, its closest peers, JPMorgan Chase & Company (JPM) and Citigroup Inc. (C) retain a Zacks #3 Rank.
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WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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