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5 Buy-Rated Banks With Increased Upside: FBR (Update 1)

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5. Wells Fargo

Shares of Wells Fargo (WFC) closed at $30.54 Friday, for a year-to-date return of 11%, after a 10% pullback in 2011. Based on a 12-cent quarterly payout, the shares have a dividend yield of 1.57%.

Wells Fargo reported fourth-quarter earnings applicable to common stock of $3.9 billion, or 73 cents a share, increasing 20% year-over-year. Over the past year, the company's operating return on average assets (ROA) has ranged from 1.13% to 1.28%, according to SNL Financial, making it the strongest and most consistent earner among the "big for" domestic bank holding companies, which also included Bank of America, JPMorgan Chase (JPM), and Citigroup (C).

FBR analyst Paul Miller last Wednesday raised his price target for Wells Fargo to $33 from $31, "because the company's relatively stable earnings stream, coupled with its strong capital position, should warrant a higher multiple," and lead to "an increase in dividends and buybacks following the publication of the Fed's stress test results in mid March."

At this point in the economic cycle, investors realize that banks will continue to face pressure on their net interest margins, with short-term rates staying near zero and overall loan demand remaining weak. Investors are keying in on banks showing growth of revenue -- which is a tall order with the Durbin Amendment severely cutting debit card interchange revenue beginning in the fourth quarter -- and loan growth.

Miller said that Wells Fargo's "operating revenue grew for the first time in the past year because Wells was able to continue taking market share from competitors on the commercial lending and mortgage origination portions of the business.

The shares trade for 10 times Miller's 2012 earnings estimate of $3.05 a share, which the analyst left unchanged.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

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