Citigroup Cuts Regional Banks

Wells Fargo
Shares of Wells Fargo (WFC) closed at $31.18 Thursday, returning 15% year-to-date, following a 10% decline in 2011. With a 22% quarterly payout, the shares have a dividend yield of 2.82%.

The shares trade for 1.9 times tangible book value, and for nine times the consensus 2013 EPS estimate of $3.68. The consensus 2012 EPS estimate is $3.28.

Citigroup analyst Keith Horowitz has a neutral rating on Wells Fargo, and on Friday lowered his price target for the shares by a dollar to $34, while leaving his 2012 EPS estimate of $3.20 unchanged, and lowering his 2013 estimate by 10 cents to $3.45, and his 2014 estimate by 25 cents to $3.65.

Citi estimates that Wells Fargo's net interest margin will decline from 3.86% this year to 3.79% in 2013 and 3.73%. Under the "flat rate scenario," the margin estimates are unchanged, except for slight decline in the 2014 margin estimate, to $3.69.

Horowitz called Wells Fargo "one of the better managed companies in the bank sector" and said "the company should benefit from its strong mortgage origination and retail brokerage franchises, as well as see further expense gains from optimizing the Wachovia franchise."

"Nevertheless," the analyst said, "we remain on the sidelines with the stock given expected challenges to net interest margins in the anticipated prolonged low rate environment."

Over the long term, Horowitz expects Wells Fargo's return on tangible equity to be "in the 18% range, so we see strong long-term value, but view current valuation as fair, with WFC trading at approximately 1.8x tangible book vs. large peers at 1.6x."

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

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-- Written by Philip van Doorn in Jupiter, Fla.

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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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