NEW YORK (
) --- A slew of analysts on Monday raised price targets and earnings estimates for
, but Atlantic Equities analyst Richard Staite sees "the shares trading broadly sideways over the coming year."
Saite in a note to clients on Monday reiterated his neutral rating on Wells Fargo, with a price target of $37, and said "with profitability already very high it is becoming increasingly difficult for the bank to show further improvement."
There's no question that Wells Fargo had an excellent first quarter, reporting a
of $5.2 billion, or 92 cents a share, compared to 91 cents the previous quarter and 75 cents a year earlier.
Heading into earnings season, all of the big banks were expected to show significant declines in mortgage revenue, because of a slowdown in home refinancing activity and because a rise in long-term interest rates had caused profit margins on the sale of newly originated loans to decline.
Wells Fargo's first-quarter mortgage revenue totaled $2.8 billion, declining from $3.1 billion in the fourth quarter, and from $2.9 billion in the first quarter of 2012. First-quarter mortgage loan originations declined to $109 billion from $125 billion the previous quarter. Net gains on mortgage loan origination and sales totaled $2.5 billion in the first quarter, declining from $2.8 billion in the fourth quarter and from $2.6 billion in the first quarter of 2012.
Declines in credit costs and other expenses more than offset the company's mortgage revenue decline. Noninterest expense declined to $12.4 billion in the first quarter from $12.9 billion the previous quarter and $13.0 billion a year earlier. The company said the sequential improvement was "primarily due to lower operating losses associated with the Independent Foreclosure Review settlement and a $250 million charitable contribution to the Wells Fargo Foundation in the fourth quarter."
Mortgage Gain on Sale margin
Wells Fargo's gain on sale margin for mortgage loans sold during the first quarter was 2.56%, which matched the record margin for the fourth quarter. But this is a delayed indicator for the company, as it recognizes loan sales when they actually occur, rather than when the new mortgage loan has its rate "locked," as most other large banks do.
"The mortgage margin held up well but we expect a large drop in Q2 as WFC's margins tend to lag peers by one quarter," Staite wrote, adding that the first-quarter mortgage revenue decline "was due to lower volumes with WFC seeing a fall in correspondent origination which could be due to more competitive pressure."
"Beyond Q2 we expect mortgage revenues to further decline due to lower refinancing volume across the industry," Staite wrote.
Another concern for Wells Fargo is pressure on the net interest margin, which is the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings. Wells Fargo's NIM narrowed to 3.48% in the first quarter from 3.56% the previous quarter and 3.91% a year earlier. The company's net interest income declined to $10.5 billion in the first quarter from $10.6 billion in the fourth quarter and $10.9 billion in the first quarter of 2012.
Staite expects the company's net interest income to see "a small uptick" in the second quarter, with further pressure on the NIM in subsequent quarters.
"Overall we expect underlying revenues to decline about 3% in Q2," he wrote. The analyst estimates that Wells Fargo will earn $3.74 a share for all of 2013, with 2014 EPS declining slightly to $2.73.
Plenty of Love
Despite his neutral rating on the shares and estimate for a slight earnings decline next year, Staite acknowledged that "WFC is a highly profitable bank currently generating a 16.9%
return on tangible common equity," which is a very strong return for any bank in the current economic environment. But sell-side analysts' recommendations and price targets usually have 12-month horizons. Of course, truly long-term investors who can really commit for several years are looking at a very high quality name and, with returns on equity at that level, shareholders will eventually make money.
Several other analysts on Sunday and Monday raised their earnings estimates and/or price targets for Wells Fargo, while maintaining positive ratings for the stock:
- KBW analyst Christopher Mutascio on Sunday reiterated his "outperform" rating for Wells Fargo, while raising his 2013 earnings estimate for the company to $3.74 from $3.59, and his 2014 EPS estimate to $3.93 from $3.83. The analyst said in a note to clients that credit quality improvement was the driving factor in the higher earnings estimates.
- Jefferies analyst Ken Usdin maintained his "buy" rating for Wells Faro, with a price target of $42, while raising his 2013 EPS to $3.70 from $3.60, and his 2014 EPS estimate to $3.75 from $3.70. Usdin said in a report that "A lower loan loss provision is the primary driver of our revisions."
- FBR analyst Paul Miller maintained his "outperform" rating on Wells Fargo, while raising his price target for the shares to $49 from $39.00. Miller stuck with his 2013 EPS estimate of $3.65, but raising his 2014 EPS estimate to $4.00 from $3.90. The analyst said in a client note that the higher price target "Our new price target represents 11.5x FY13E earnings of $3.65, a slight premium to peers trading at 11.1x," he wrote. Miller added "we view Wells Fargo as one of the best positioned to weather the current environment as its resilient balance sheet and mortgage banking platform continue to offset the effects of low rates and continued de-leveraging, factors that are haunting other banks."
- Sterne Agee analyst Todd Hagerman reiterated his "buy" rating for Wells Fargo, while raising his price target for the shares to $42 from $41, and maintaining his 2013 EPS estimate of $3.65 and hi 2014 EPS estimate of $4.00. Hagerman said in a report that "earnings momentum remains sluggish," but added that "while a fair amount of the EPS slowdown is discounted in the stock, we see positive EPS leverage on the expense side post the regulatory settlements and further declines in repurchase requests."
Wells Fargo's shares closed at $37.21 Friday, returning 10% this year, following a 27% return during 2012. The shares trade for 9.5 times the consensus 2014 earnings estimate of $3.90 a share, among analysts polled by
. The consensus 2013 EPS estimate is $3.69.
Following the completion of the
annual stress tests, Wells Fargo on March 14 announced it had been approved by the regulator to raise its quarterly dividend on common shares to 30 cents a share in the second quarter from 25 cents, subject to approval by the company's board of directors. The 30-cent quarterly payout would equate to a dividend yield of 3.22%, based on Friday's closing price. The company was also approved by the Fed for "a proposed increase in common stock repurchase activity for 2013 compared with 2012." Wells Fargo's share buybacks during 2012 totaled $3.9 billion.
Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.
-- 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.