Wells Fargo Rises On Organic Growth: Should We Hold?

On Nov 28, 2014, we issued an updated research report on Wells Fargo & Company WFC. Shares of this major regional bank have recorded a year-to-date return of 23.8%. The bank recently reported impressive third-quarter 2014 results.

Results were aided by increased loan and deposit balances along with higher revenues. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.

Wells Fargo reported third-quarter 2014 earnings of $1.02 per share, thereby surpassing 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate. Net income was up 2% year over year to $5.4 billion. Moreover, revenues rose 4% year over year.

The company exhibited a decent performance in the last four quarters as evident from its earnings history. Positive earnings surprises were posted in two of the last four quarters with an average beat of 2.57%, and results were in line in the remaining two quarters.

Wells Fargo experienced strong growth (up 4%) in year-end loans during the first nine months of 2014, despite the planned runoff from non-strategic/liquidating portfolios. Notably, third-quarter 2014 was the 13th consecutive quarter of loan growth. Further, reflecting commercial and consumer businesses growth, core deposits grew 7% year over year as of Sep 30, 2014. Therefore, both loan and deposit balances are poised to grow amid an improving economy.

Wells Fargo remains focused on managing capital levels efficiently. This is well evident from the clearance of the 2014 stress test and estimated Tier 1 common equity under Basel III increasing to 10.46% as of Sep 30, 2014, under the advanced approach (fully phased-in). Recently, in Apr 2014, the company increased its dividend by 16.7%. Further, Wells Fargo returned $11.6 billion to shareholders through dividends and share repurchases in the first nine months of 2014. We anticipate such capital deployment activities to boost investors' confidence.

Wells Fargo has implemented company-wide expense management initiatives. In addition, with the completion of the integration process and the continuation of the economic recovery, expenses are anticipated to decrease, thereby providing opportunities for future improvement in operating leverage. Notably, efficiency ratio for the first nine months of 2014 was 57.9%, within the targeted efficiency ratio range of 55–59%.

Despite strong fundamentals, we believe there are certain issues that may create pressure on the company's financials in the near term. These include absence of credible improvement in the mortgage market, declining net interest margin due to low interest rate environment and the prevailing stringent regulatory landscape.

Following the third-quarter 2014 results, the Zacks Consensus Estimate over the past 30 days remained stable at $4.10 per share for 2014, while it ticked up by a penny to $4.24 per share for 2015. Hence, Wells Fargo currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked finance stocks include Bank of the Ozarks, Inc. OZRK, First NBC Bank Holding Company NBCB and Customers Bancorp, Inc. CUBI. All three stocks carry a Zacks Rank #2 (Buy).