CIT Would Be Deal Gravy for Wells Fargo: Street Whispers

NEW YORK (TheStreet) -- Wells Fargo (WFC) needs "earning assets at attractive yields, given the low loan growth environment and the Fed's approach to make most every low-risk investment as unattractive as possible."

This is what Stifel Nicolaus analyst Christopher Mutascio said on Monday, when touting CIT Group (CIT) as a potential takeout target for Wells Fargo.

Among the "big four" U.S. bank holding companies, Wells Fargo has been the big star through the credit crisis and its aftermath, with much stronger and consistent earnings performance, reflected in the considerably price ratios for its stock than its national competitors.

Wells Fargo's shares closed at $35.30 Friday, returning 29% year-to-date, following a 10% decline during 2011. The shares trade for two times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 earnings estimate of $3.66 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.31.

For the 12-month period ended June 30, Wells Fargo's operating return on average assets (ROA) was 1.30%, according to Thomson Reuters Bank Insight, while the company's return on average equity (ROE) was 11.57%.

Here's how those numbers compare to the remaining members of the "big four" club:

• Shares of JPMorgan Chase (JPM) closed at $41.25 Friday, returning 26% year-to-date, following a 20% loss last year. The shares trade for 1.2 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.20. The consensus 2012 EPS estimate is $4.71. JPMorgan's ROA for the 12-months ended June 30 was 0.79%, while its ROE was 9.55%. The big story for JPMorgan Chase this year has been the "London Whale" hedge trade, which led to second-quarter losses of $4.4 billion for the company's Chief Investment Office. But JPMorgan still managed to earn a $5.0 billion profit during the second quarter.
• Bank of America (BAC) has seen its shares return 64% year-to-date, through Friday's close at $9.19. The shares trade for 0.7 times tangible book value, and for 10 times the consensus 2013 EPS estimate of 91 cents. The consensus 2012 EPS estimate is 0.55%. Over the past four quarters through June, Bank of America's ROA was 0.52%, while the company's ROE was 4.84%. The company's mortgage putback drama continues, with repurchase demands increasing by 41% during the second quarter alone, to $22.7 billion as of June 30.
• Citigroup (C) closed at $33.81 Friday, returning 28% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times tangible book value, and for 7.5 times the consensus 2013 EPS estimate of $4.53. The consensus 2012 EPS estimate is $4.09. Citi's ROA over the 12-month period ended June 30 was 0.55%, and its ROE was 5.78%. Truly long-term investors are hoping eventually to receive a major return of capital from the company, as its Citi Holdings subsidiary continues to wind down, and the company eventually reverses some or all of its deferred tax valuation allowance.

Wells Fargo has benefitted from very strong mortgage volume this year, with record-low rates, and President Obama's expansion of the Home Affordable Refinance Program, which allows qualified borrowers with loans held by Fannie Mae (FNMA) or Freddie Mac (FMCC) to refinance their full loan balances at much lower rates, no matter how much the market value of the home has declined.

But the refinancing wave won't last forever, and Wells Fargo faces the additional challenge of a narrowing net interest margin, which is the difference between a bank's average yield on loans and investments, and the average cost for deposits and borrowings.

According to Guggenheim Securities analyst Marty Mosby, among the largest U.S. bank holding companies, "Wells Fargo (WFC) has the most margin compression today expected over the next year," as the company has a large percentage of assets with original maturities of greater than three years, that are "repricing down now, lower than they were three years ago."

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