Mutascio on Monday said that a 17-point third-quarter drop in Wells Fargo's net interest margin "would be nearly double the 9 basis points of margin compression we were anticipating this quarter." This will be partially offset by "stronger than originally anticipated mortgage banking income will partially offset the negative impact of the substantial margin compression," according to the analyst, but "as the refinance boom wanes, we believe the margin compression will have a greater impact on EPS - especially if the Fed stays true to its pledge of near 0% short-term interest rates for the next three years."

Mutascio lowered his 2012 earnings estimate for Wells Fargo by only three cents, to $3.30 a share, but lowered his 2013 EPS estimate by 13 cents to $3.52, and lowered his price target for the shares by two dollars, to $38.00.

Wells Fargo's shares closed at $36.13 Friday, returning 34% year-to-date, following a 10% decline during 2011. The shares trade for 2.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 EPS estimate of $3.66, among analysts polled by Thomson Reuters.

The shares trade at a much higher price-to-book ratio than the other three members of the "big four" U.S. banking club, however, Wells Fargo's steady and solid earnings support the higher valuation. The company's operating returns on average assets (ROA) have ranged between 1.26% and 1.40% over the past five quarters, according to Thomson Reuters Bank Insight, while its operating returns on equity (ROE) have ranged between 11.51% and 12.37%.
  • Shares of JPMorgan Chase (JPM) closed at $41.57 Friday, returning 28% year-to-date, following a 20% decline last year. The shares trade for 1.3 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.20. Over the past five quarters, the company's ROA has ranged from 0.68% to 0.99%, while its ROE has ranged from 8.25% to 11.94%.
  • Shares of Bank of America (BAC) closed at $9.55 Friday, returning 72% year-to-date, following a 58% decline during 2011. The shares trade for 0.8 times tangible book, and for 1.5 times the consensus 2013 EPS estimate of 91 cents. Over the past five quarters, Bank of America's ROA has ranged from a negative 1.51% - during the second quarter of 2011, when the company lost $8.8 billion, or 90 cents a share, mainly from a mortgage putback settlement with private investors -- to 1.08%. BAC's ROE has ranged from a negative 15.02% to 11.21%, over the same period.
  • Shares of Citigroup (C) closed at $34.79 Friday, returning 32% year-to-date, following a 44% decline during 2011. The shares trade for 0.7 times tangible book value, and for eight times the consensus 2013 EPS estimate of $4.53. Citigroup's ROA has ranged from 0.20% to 0.77% over the past five quarters, while the company's ROE has ranged from 2.18% to 8.41%.

Despite the downgrade, Mutascio said that "for those investors trying to hedge themselves against the never-ending "risk-on"/"risk-off" rotation trades," we would still view WFC (as well as US Bancorp - USB - Hold) as the high quality names within a bar-bell investing approach (holding some high quality banks along with some banks with more risk), given their above-peer profitability and strong management teams."

A different view on mortgage volume.

FBR analyst Paul Miller on Monday reiterated his "Outperform" rating on Wells Fargo, with a price target of $39, saying after meeting with the company's mortgage banking management that "we continue to favor WFC due to its significant exposure to the mortgage market, which should provide a meaningful tailwind to earnings for the foreseeable future."

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