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JPMorgan Sees 59% Upside for Wells Fargo

WASHINGTON ( TheStreet) -- With Wells Fargo (WFC - Get Report) becoming "more active in acquisitions as an additional driver of earnings growth," JPMorgan Securities analyst Vivek Juneja sees a bargain for investors.

The analyst's 12-month price target for Wells Fargo is $41, which implies 59% upside potential for the shares, and is based on a valuation of twice the company's estimate tangible book value at the end of 2012, versus a "peer group multiple of 1.5x tangible book value."

Junega expects Wells Fargo to continue trading at a premium to its peers, "because of its strong track record.

According to data provided by SNL Financial, Wells Fargo has certainly beaten the remaining members of the "big four" U.S. bank club, with operating returns on average assets (ROA) ranging between 1.12% and 1.29% over the past five quarters.

Here's how the remaining members of the "big four" group stack up:

  • For Bank of America (BAC - Get Report) the ROA over the past five quarters has ranged from a negative 1.51% in the second quarter, when the company posted a net loss of $9.1 billion, springing from a $14.5 billion loss in its Consumer Real Estate division as it tried to put mortgage putback demands behind it, to a positive ROA of 1.08% in the third quarter.
  • For JPMorgan Chase (JPM - Get Report), the ROA over the past five quarters has ranged between 0.76% and 1.06%.
  • Citigroup's (C - Get Report) ROA has ranged between 0.28% and 0.76% over the past five quarters.

Wells Fargo has also seen the best year-to-date return among the big four, with shares down "only" 15% as of Tuesday's market close, while shares of JPMorgan were down 25%, Citi was down 43%, and Bank of America was down a whopping 60%. In comparison, the KBW Bank Index (I:BKX) was down 28% year-to-date.

With Wells Fargo strongly positioned for compliance with enhanced Basel III capital requirements, Juneja expects the company to "to go to 30% dividend payout ratio and return more capital through share buybacks but keep some of its capital generated for acquisitions." JPMorgan "would not be surprised to see dividends rise to $0.86 in 2012 from $0.48 in 2011."

Juneja expects the company to be an "active participant" as European Banks sell assets, following recent deals, including acquisitions of "loan portfolios and businesses such as hedge fund custody and servicing provider LaCrosse with $240bn in assets under administration,: and "acquisitions of CRE portfolios from Irish entities."

Wells Fargo expects to achieve "normalized" ROA of 1.5%, irrespective of the release of loan loss reserves, but Juneja says that this will require a reduction in expenses "to offset decline in high yielding consumer-related assets.

In conclusion, Juneja reiterated JPMorgan's "Overweight," or "Buy," rating for Wells Fargo's shares, because of "better fee income growth opportunities with recent acquisitions of commercial real estate loan portfolio, hedge fund servicing and administration business and team of bankers," the company's cost reduction plan, its "lower international risk and capital markets exposure," than the rest of the big four, and the company's "defensive nature in times of uncertainty."

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock. -- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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