Bland Recipe Keeps Wells Fargo Sizzling

It eschews M&A and investment banking while remaining a major performer among banks.
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Wall Street investment bankers must hate

Wells Fargo

(WFC) - Get Report

.

Try as they might, the dealmakers can't entice the nation's sixth-largest bank into doing any sizable acquisitions. While competitors such as

Bank of America

(BAC) - Get Report

,

J.P. Morgan Chase

(JPM) - Get Report

and

Wachovia

(WB) - Get Report

have all pulled off big deals in the past few years, Wells Fargo has been the banking sector's proverbial M&A wallflower.

In fact, over the past five years, no acquisitions done by Wells Fargo have been for more than $1 billion, according to Thomson Financial. The last significant move the San Francisco-based bank made was its $2.8 billion acquisition of First Security Corp. in 2000.

Wells Fargo hasn't done the kind of megadeal that gets Wall Street buzzing since its $34 billion marriage with Norwest Corp. in 1998.

Wells Fargo's disdain for playing the merger and acquisition game reflects a longstanding decision by CEO Richard Kovacevich not to overpay for a smaller bank, and his commitment to grow from within, say industry analysts and longtime observers. It's a policy most don't expect Kovacevich to waver from, even in the wake of high-profile deals such as

Capital One's

(COF) - Get Report

$14.6 billion acquisition of

North Fork Bancorp

(NFB)

and JP Morgan Chase's $3 billion asset-swap with Bank of New York.

The bank's supporters say Wells Fargo has done just fine ignoring the din emanating from Wall Street urging it to make a pitch for some regional lender, such as Cincinnati-based

Fifth Third Bancorp

(FITB) - Get Report

or Pittsburgh's

PNC Financial

(PNC) - Get Report

.

Wells Fargo investors have come to count on the bank for both consistent earnings growth and consistent stock appreciation -- even if that kind of news doesn't often make for big headlines.

"They have managed the company extremely well," says Scott Rodes, director of equity research for Bahl & Gaynor, a Cincinnati money-management firm that owns about 1 million shares of Wells Fargo. "We are not of the opinion that bigger is better. We don't expect it to go out and enlarge its footprint to expand its retail presence."

For months now, Rodes has heard rumors about Wells Fargo eyeing Fifth Third, and he has discounted all of them. He says Wells Fargo has little interest in expanding its retail operation beyond its stronghold in the western United States.

If the bank's going to do any deal, he said, look for it to make an acquisition in Asia. But Rodes says he doesn't believe Wells Fargo's management feels any pressure one way or the other.

Some say that could change, however, if a rival lender bought

US Bancorp

(USB) - Get Report

, an oft-discussed acquisition target that is Wells Fargo's main competitor in the western U.S.

Still, even without any major deals, Wells Fargo ranks as the largest bank west of the Mississippi, with $428 billion in assets. Operating in 23 states, the bank is one of the nation's largest home lenders.

One reason Wells Fargo's management has been able to eschew so-called transforming deals is the fact that its stock has been one of the banking sector's solid performers over the past several years.

This year, shares of Wells Fargo are up 4% to $64.88. Last month, the stock hit a 52-week high at $65.51. The Philadelphia KBW Bank Index is up 3.4% since the beginning of the year. Over the past five years, Wells Fargo has outperformed most of its peers except for BofA and Wachovia.

Even better, shares of Wells Fargo trade at a slight premium to many large banks. With a forward price-earnings ratio of 11.8, the stock trades at higher multiple than BofA, Citigroup, JP Morgan,

National City

(NCC)

and Wachovia.

"If you look at its stock price, it's been more of a consistent performer," says Chris Mutascio, a Credit Suisse bank analyst. "It's hard to beat Wells' trend."

One thing that has benefited Wells Fargo is that it remains a bit player in investment-banking work. That's enabled it to avoid the conflict of interest scandals that have led to big regulatory fines against Citigroup, J.P. Morgan and Bank of America. Unlike its peers, Wells Fargo's management hasn't had to set aside huge reserves to cover the cost of settling scandal-related litigation.

Indeed, Kovacevich and his management team consistently score high marks for their stewardship of the bank's franchise, even from analysts known for their critical assessments.

"When we met with senior management in San Francisco, we left with a feeling that this management is still better than most in the industry," says Prudential Equity Group analyst Michael Mayo in a recent report. "Consistency is shown in many of its actions. We are reassured that the company successfully steers clear of the 'dumb stuff.'"

Still, Mayo is cautious on Wells Fargo's stock in the near term because he's concerned about the impact of the slowdown in the mortgage business on earnings. He says "there isn't a clear driver to replace the decelerating mortgage business."

But even with those concerns, Mayo is still looking for the bank to post about 11% earnings growth when it reports first-quarter earnings on April 18. Mayo's estimates are in line with what most other analysts are expecting, according to Thomson Financial.