Wells Fargo Looks Attractive

Yesterday, I wrote that US Bancorp's (NYSE: USB  ) results suggested that the loan-loss cycle had peaked. Good news for bank share investors: Today's earnings report from Wells Fargo (NYSE: WFC  ) -- the nation's largest pure-play commercial bank -- appears to tell a similar story.

Another bank "beat"
Wells Fargo came in ahead of analysts' expectations -- a familiar refrain for banks during this earnings season -- with $0.45 in diluted earnings per share against an estimated $0.42. The bank believes provisions for future loan losses and charge-offs peaked in the second half of 2009 and expects loan provisions to decline throughout 2010. With the exception of Bank of America (NYSE: BAC  ) , net charge-offs as a percentage of total loans remained relatively stable or declined at the nation's largest banks over the past two quarters:

Bank

Net Charge-Offs as a
% of Loans, Q1 2010

Q4 2009

Bank of America (NYSE: BAC  )

4.44%

3.71%

Citigroup (NYSE: C  )

1.14%

1.17%

JPMorgan Chase (NYSE: JPM  )

4.83%

5.27%

US Bancorp (NYSE: GS  )

2.39%

2.30%

Wells Fargo 

2.71%

2.71%

Source: Company releases.

Cheaper and better-run
Despite the massive run-up off their March 2009 low, Wells Fargo shares -- priced at less than nine times estimated 2012 earnings per share -- are cheaper than many of its competitors'. The company is also better-managed: For example, Wells Fargo is prepared for a rise in interest rates. That sets it apart from institutions that have been lulled into complacency by the Fed's mantra of "exceptionally low rates for an extended period." If the Fed does begin to raise rates more aggressively than expected, I expect many banks to be caught flat-footed, just as they were in 1994, which turned into the worst bear market in bonds in a generation.

Current Federal Reserve policy is creating tangible risks in U.S. stock and bond markets -- but there are alternatives for your money. Tim Hanson highlights the top markets right now.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy


Read/Post Comments (3) | Recommend This Article (9)

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  • Report this Comment On April 21, 2010, at 7:02 PM, ron153 wrote:

    Wells credit quality has improved. As this continues, its provions for loan losses will decrease significantly. There are also considerable additional cost savings coming from the Wachovia merger, and the possibility that a portion of the reserves taken in that acquisition will be reversed and amotrized into income. The company is being very conservative with its reserves. Wells is distinct from other banks in that Wells has a very small portion of its profits from trading, but the beats at JPM C, and BAC all came from trading, which is an unpredictable and highly volatile source of income. Wells makes its money from traditional banking. Its balance sheet is stronger than ever and there is abundant liquidity. The share price is extremely discounted from Wells earnings potential over the next couple of years.

    Wells Fargo is the largest holding in my personal and client portfolios. It is no wonder that successful investors like Prem Watsa and Warren Buffett count it among their top holdings.

    Ron Beasley

    www.rwbi.net

  • Report this Comment On April 22, 2010, at 8:44 AM, JibJabs wrote:

    "priced at less than nine times estimated 2012 earnings per share"

    Pure speculation.

  • Report this Comment On April 22, 2010, at 8:55 AM, JibJabs wrote:

    "priced at less than nine times estimated 2012 earnings per share"

    Pure speculation.

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