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Wells Fargo is a Less Risky Bank of America (Update 2)

Updated with afternoon close information and updated total return data.

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) has consistently outperformed the other members of the "big four" U.S. bank club, and Sterne Agee analyst Todd Hagerman says investors could see "an upside earnings surprise in 2012."

Wells Fargo's shares rose 2% to close at $30.37 Thursday, returning 13% year-to-date. While shares of Bank of America (BAC - Get Report) were up 44% year-to-date and Citigroup (C - Get Report) saw a year-to-date total return of 25% through Friday, Wells Fargo's better earnings performance has made it a much less risky play.

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Wells Fargo's shares pulled back only 10% in 2011, when the The KBW Bank Index (I:BKX) dropped 25%, while Bank of America dropped 58%, Citigroup declined by 44%, and JPMorgan Chase (JPM - Get Report) saw a 20% decline.

Not surprisingly, in light of the stock performance, Wells Fargo has been the best and most consistent earner among the big four over the past five quarters, with a return on average assets (ROA) ranging from 1.11% to 1.27%, according to HighlineFI.

In comparison, JPMorgan Chase's ROA has ranged between 0.66% and 1.06% over the past five quarters, while for Citigroup, the ROA has ranged between 0.26% and 0.77%, and for Bank of America, the ROA has ranged from a negative 1.61% (during the second quarter of 2011, when the company lost $8.8 billion, with real estate losses of $14.5 billion) to 1.08%.

Bank of America has also seen a recent downgrade parade, as analysts cut their buy ratings to neutral ratings, in light of the run-up in the shares, with some trimming earnings estimates to reflect the continued decline in earnings assets as CEO Brian Moynihan continues to trim the balance sheet.

Hagerman reiterated his "Buy" rating for Wells Fargo, while raising his price target to $36 from $33, saying "the shares present a favorable risk/reward for investors looking for a well-capitalized bank with potential earnings catalysts in 2012."

The analyst raised his 2012 earnings estimate for Wells Fargo to $3.20 a share from $3.05, and his 2013 EPS estimate to $3.50 from $3.20.

Following the announcement by the Justice Department last week of a $25 billion mortgage foreclosure settlement with the largest loan servicers, Wells Fargo said that its contribution to the settlement would total $5.1 billion, but 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.

Wells Fargo does expect that the refinancing portion of the settlement will "be recognized over a period of years in the form of lower interest income."

Hagerman has included the pressure on interest income in his earnings forecasts, and says his net interest margin "assumptions remain relatively conservative given the low interest rate environment, recent AG settlement, and excess liquidity for 2012."

The analyst also sees the market supporting higher valuations for the stock, with his new price target implying "a reasonable 1.7x multiple on our estimated 2012 tangible book value and 11x our 2012 estimate, and 10-11x our 2013 estimate.

Here's a quick "big four" comparison of price multiples to tangible book value and 2012 EPS estimates:

  • As of Thurdsay's market close, shares of Wells Fargo traded for 1.8 times their Dec. 30 tangible book value, according to HighlineFI, and for 9.5 times the consensus 2012 earnings estimate of $3.20 a share, among analysts polled by Thomson Reuters.
  • Bank of America traded for just 0.7 times tangible book value, but for 11.4 times the consensus 2012 EPS estimate of 71 cents.
  • Citigroups' shares were also heavily discounted, at 0.7 times tangible book value, and a much lower 8.2 times the consensus 2012 EPS estimate of $3.98.
  • JPMorgan Chase traded for 1.2 times tangible book, and for 8.1 times the consensus 2012 EPS estimate of $4.67.

Hagerman's bottom line view on Wells Fargo is that "expectations for positive operating leverage through 2012, combined with WFC's earnings diversity and balance sheet flexibility, favorably position the company to produce an upside earnings surprise in 2012, even against the backdrop of a weak economic environment."

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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