This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Two Great Banks Just Got Downgraded to Underweight, Shares Fall

NEW YORK ( TheStreet) -- Atlantic Equities analyst Richard Staite downgraded Wells Fargo (WFC - Get Report) and US Bancorp (USB - Get Report), two of the most highly regarded stocks in the banking sector, to "underweight" on Wednesday.

Shares of Wells Fargo was down 0.6% to $40.41 in afternoon trading while US Bancorp were losing 0.4% to $35.28.

Staite sees little room for positive earnings surprises from the two banks, given expectations are already running high and valuations are rich. Both Wells Fargo and US Bancorp are highly profitable, earning returns on assets and tangible equity that are well above the industry average.

The Atlantic Equities analyst said Wells Fargo is likely "overearning" relative to its normal capacity due to high mortgage refinance volumes.

"Mortgage production revenue was abnormally strong in 2012, driven by wide margins and high refi volumes. WFC and USB were the largest beneficiaries with 14% and 9% of total revenue generated from this source, up from only 7% and 3.5% in 2011," he wrote.

Wells Fargo is already earning above its target return on assets of 1.3%. While the consensus among analysts is for returns on assets to stay above this rate, Staite believes the bank will earn less in the coming quarters.

"While all commentators expect a reduction in refi we remain concerned that the scale of the decline could still surprise," he wrote.

The analyst expects industry refininancing volumes to fall 25% in 2013 and as much as 60% in 2014.He expects Wells Fargo to see a decline in mortgage production revenue from $12.2 billion in 2012 to only $7.5 billion in 2013 and $5 billion in 2014 and 2015.

Meanwhile, U.S.B ancorp is already earning close to its normalized earnings levels on an ROA basis and should remain stable, according to the analyst. The bank is also expected to see a sharp decline in mortgage production revenue from $1.9 billion in 2012 to $1 billion by 2015.

Both banks are most exposed among peers to a slowdown in mortgage production revenue, according to the analyst.

Staite instead considers Bank of America (BAC - Get Report) a top pick. According to the analyst, the bank is currently "underearning" by as much as 50% due to high legal and asset servicing costs. He expects the gap to narrow to 10% by 2015, although consensus expects the gap to remain at 21%. -- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.56 0.00%
USB $42.69 0.00%
WFC $49.98 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs