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Wells Fargo (WFC) PT Lifted To $37, 'Outperform' Reiterated On Attractive Valuation, Positive Outlook

 April 16, 2012 08:07 PM
 


RBC Capital Markets analyst Joe Morford increased his price target on shares of Wells Fargo & Co. (NYSE:WFC) to $37 from $35 while reiterating its "Outperform" rating, given the company's attractive valuation and positive outlook.

After the company's strong Q1 results, the brokerage lifted Q2-2012 EPS estimate to $0.78 from $0.77, its 2012 estimate to $3.25 from $3.20, and its 2013 estimate to $3.65 from $3.60.

Wells reported Q1-2012 EPS of $0.75, topping both Morford's $0.70 estimate and consensus of $0.72, as strong mortgage banking and a better-than-expected margin more than offset higher expenses. Overall, despite the challenging operating environment Wells generated an impressive 1.31% ROA and 12.1% ROE.

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Bucking the industry trend, Wells' margin increased again, albeit modestly (up 2 basis points to 3.91%), as loan yields rose 6 basis points to 4.16% and funding costs fell 4 basis points to 0.48%.

Meanwhile, end-of-period loans declined 0.4% to $766.5 billion with runoff in the liquidating book outpacing organic growth and portfolio purchases. Overall net interest income essentially held flat (versus a 2% decline modeled).

Excluding securities gains, non-interest income rose 11% sequentially. This was mostly driven by a 21% increase in mortgage banking revenues due to higher origination volumes (up 8%) and gain on sale margins (up 46 basis points to 2.36%). Importantly, with application volumes up 20% sequentially and Harp 2.0 refinancing building, Wells' mortgage business should remain strong in the near term.

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Operating expenses increased 4% sequentially to $13.0 billion due to seasonal pressures and higher incentive compensation tied to the strength in mortgage and capital markets.

Management reiterated its expectation for a $500 million to $700 million decline in expenses next quarter, however, it slightly raised its guidance for the Q4-2012 run-rate to the high-end of the targeted $10.75 billion to $11.25 billion range. Overall the efficiency ratio fell slightly to 60.1%.

NPAs increased 3% to 3.48%/loans following a new regulatory rule that reclassified $1.7 billion of home equity loans as non-accruals. Absent this change, NPAs would have declined 4%. Meanwhile NCOs fell to 1.25%/loans, their lowest level since 2007.

With credit generally improving, management released another $400 million from reserves, which still represented a healthy 2.50%/loans. Finally, capital continued to accumulate with the Tier 1 common equity ratio strengthening 32 basis points to 7.81% under Basel 3.

WFC closed Monday's regular trading up 0.94% at $33.15.

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