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The Long-Term Case for Wells Fargo and U.S. Bancorp (Update 2)

First-quarter Concerns

The major headwinds heading into earnings season is the expected decline in mortgage loan origination fees, with a lower volume of refinancing activity, and reduced gains on the sale of newly originated loans to Fannie Mae (FNMA) and Freddie Mac (FMCC).

These are major short-term concerns for Wells Fargo, which currently dominates the U.S. mortgage market with a 25% share of origination volume. Then again, JPMorgan analyst Vivek Juneja on Friday made the case that improving loan servicing revenue and accounting adjustments will offset most of the company's mortgage revenue declines this year.

"We expect 1Q13 earnings to be relatively weak for the bank group, owing to soft loan growth and a drop-off in mortgage banking. This poses risk for a pullback in bank stocks," according to BMO Capital Markets analyst Lana Chan.

In a note to clients on Tuesday, Chan included U.S. Bancorp among the banks she was "most concerned about," along with Comerica (CMA) of Dallas and Cathay General Bancorp (CATY) of Los Angeles.

BMO Capital Markets analyst Peter Winter rates both Wells Fargo and U.S. Bancorp "market perform," and on Tuesday raised his price target for Wells Fargo by two dollars to $42, and his target for U.S. Bancorp by a dollar to $37, which the firm said was "to reflect a switch in valuation methodology to forward P/E on 2014 estimates."

JPMorgan Chase analyst Vivek Juneja rates Wells Fargo "overweight," with a price target of $41.00. The analyst in a report said that his positive view of the shares was based on an attractive valuation, and also "due to 1) better fee income growth opportunities with recent acquisitions of loan portfolios, expansion of capital markets and wealth management businesses as well as leading mortgage banking position; 2) cost reduction plan; [and] 3) lower international risk and capital markets exposure relative to peers."

Juneja has a neutral rating on U.S. Bancorp, with a price target of $37.50, saying in the note on Tuesday that the rating is "due to our expectations for slower revenue growth, getting closer to peer revenue growth, as well as appropriate valuation."

On the other hand, Juneja wrote that "USB has a very diverse and strong array of businesses, strong management team, low cost efficiency, and lower impact from regulatory/political issues. As a result, USB has higher profitability which also drives greater share of EPS growth through share buybacks."

Wells Fargo's shares were up over 1% to close at $37.45, while U.S. Bancorp rose slightly to close at $33.69.

A "Core Holding" for Long-Term Investors

While being careful to say "this is not a trading call," KBW analyst Christopher Mutascio said in a note to clients on Tuesday that "Wells Fargo should continue to be a core holding for long-term investors."

According to Mutascio, Wells Fargo has achieved a compounded annual growth rate for tangible book value per share plus dividends, of 13.9% since the end of 2001. This compares to a median CAGR of just 0.4% for 11 large-cap bans covered by KBW.

Second-place for CAGR since the end of 2001 for tangible book value plus dividends goes to PNC Financial Services Group (PNC), at 11.3%, with U.S. Bancorp in third place, with a CAGR of 8.3%.

When looking at share price performance over the same period, Wells Fargo was in first place, with shares rising 57% from the end of 2001 through 2012, while U.S. Bancorp placed second, with shares rising 53%. JPMorgan was ranked third, with shares rising 21%. PNC was a distant fourth, with shares rising just 4% for that 11-year period.

Then again, again, that's pretty decent performance for the period, considering the other seven big banks saw double digit losses. Fifth Third Bancorp brought up the rear, with shares falling 75% from the end of 201 through the end of 2012, according to KBW.

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

>Contact by Email.

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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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