Bank Stock Investors: Ignore Mortgage Settlement (Update 3)

Wells Fargo also agreed to contribute $5.3 billion to the foreclosure settlement, including $900 for refinancing relief, "$3.4 billion in consumer relief programs," and "$1.0 billion paid directly to the federal government and the states for their use to address the impact of foreclosure challenges as they see fit."

The company said that as of Dec. 30, it had "fully accrued for the Foreclosure Assistance Payment," and that "the expected impact of the Consumer Relief Program was covered in our allowance for credit losses and in the non-accretable difference relating to our purchased credit-impaired residential mortgage portfolio," meaning that loans acquired as part of the Wachovia acquisition at the end of 2008 had already been sufficiently written-down.

The company did say that the refinancing portion of the settlement would "be recognized over a period of years in the form of lower interest income."

Bank of America Merrill Lynch analyst Erica Penala said on Friday that the impact of the settlement on her earnings forecasts for Wells Fargo was "minimal, as, the $900mn set aside would be taken over time and is just 2% of WFC's annual net interest income capacity near-term," adding that "WFC has already reduced the value of its mortgage servicing rights by $2.6bn, partly to reflect higher servicing costs."

Penala reiterated her "Buy" rating for Wells Fargo, with a price objective of $33, "despite the run in the stock, especially as peer valuations appear quite stretched relative to both near-term and even 'normalized' EPS power."

Wells Fargo's shares are up 10% year-to-date through Friday's close at $30.27, after pulling back 10% in 2011. The shares trade for 1.8 times tangible book value, and for 10 times the consensus 2012 EPS estimate of $3.20.

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

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