Wells Fargo & Company (NYSE:WFC) is a San Francisco, California based financial services company with $1.3 trillion in assets. It was established in 1852 and currently is second largest bank in the United States by deposits and largest by branches. On an average, Well Fargo serves one in three houses in the U.S. It offers a broad range of financial products ranging from banking and insurance to mortgages and commercial finance.

Wells Fargo logo

Wells Fargo & Company (NYSE:WFC) offers EPS visibility compared to its money centre peers, and EPS defensibility relative to regional peers. WFC is not resistant to a weak consumer, but the valuation and the tremendous fourth quarter result make it a compelling stock.

Strong Financials

Well Fargo completed 2012 with record earnings of $5.1 billion in the fourth quarter. This earning was up from 24% from the last years earnings. The earning of the Bank for the full year 2012 was record $18.9 billion, which is an increase by 19% from 2011. The earning per share also grew by 19%. The Bank generated 6% revenue growth and pretax, pre provision profit increased by 13%. The efficiency ratio of the bank increased by 250 basis points to 58.5%. Total loans of the company grew by $30 billion, increase by 4%. The bank has now over $1 trillion in deposits, which is an increase by 9% from the past year.

Well Fargo achieved this strong result in the year 2012 despite, regulatory changes and an uncertain economic and political environment.


Well Fargo erected its position as a dominant player in the American mortgage market after reporting its twelfth consecutive quarter of earnings growth. The bank’s fourth quarter profit increased by 24% to $5.1 billion. The mortgage revenue for the bank increased by 30% to $3 billion.

The big banks were bailed out of the mortgage market in the aftermath of the financial crisis, but Well Fargo penetrated into this sector and is able to achieve 3 times as much business as its nearest competitor.

One of the reasons can be the market, which contracted during the economic crash taking in with it rivals of Well Fargo such as Indy Mac. Well Fargo reacted quickly to fill that gap. Also in 2012, insurers MetLife Inc quit the mortgage origination business.

Just like the other banks do, Fargo also earns a profit by raising mortgage loans and then selling them in bulk to Federal National Mortgage Association (OTC:FNMA) and Freddie Mac, the government mortgage companies. Other than this Well Fargo started keeping its mortgages on its balance sheet, where they earn income from interest and principal payments.

Wells Fargo & Company (NYSE:WFC) kept $9.7 billion worth of first mortgage on its balance sheet. The company has forgone the opportunity of earning an additional $340 million by not passing it to government mortgage agencies, but it believes that the improving housing market and the economy will do well to the bank’s decision.

Well Fargo turned out to be an efficient and smarter lender than its peers. The total mortgage it serviced in the third quarter its 7.32% are in delinquency or foreclosure as against the average 10.17 of the industry. Bank of America Corp (NYSE:BAC) has more than 13% of the servicing mortgage portfolio delinquency or foreclosure. And JPMorgan Chase & Co. (NYSE:JPM) is at 10.7%. The ratio of Well Fargo was down to 7.04% in the fourth quarter.

The Bank’s brokerage business increased its advice force at the time when other rival banks are cutting on advisers. The company added more advisors, which helped to expand the company’s client base. Unlike its competitors, Well Fargo has proved its commitment to its wholesale and correspondent lending business. The company has made close contact with the local residential brokerages and at the same time building “market relationship” with Terra holdings, which owns Halstead and Brown Harris Stevens.

The bank is on its way to keep the relationship with mortgage brokers intact when other banks are closing it down.

Bank of America’s shares have gained more than 78% over last year. For 2012, banks earnings per share $0.25. BAC quarterly profit fell by about 63 percent on account of $5 billion of mortgage-related charges. In the fourth quarter, bank axed 3,000 jobs in its mortgage servicing unit. The bank also shed 6,000, or 35 percent, of its contractors.

JPMorgan’s customer service score improved by 6% over 2011, which is behind smaller banks and credit unions but better than all the larger banks. Last year, the bank hired about 13000 employees, with most of them helping to process troubled mortgages. For the fourth quarter, profit jumped 53 percent, beating analysts’ estimates.

Well positioned

The mortgage environment is expected to remain strong in fiscal year 2013, despite the mortgage cliff. The management is not worried about the mortgage cliff due to its sizable service portfolio, balanced against its production, low MSR valuation as of now but can see an improvement with the rise of rate and related variable expense base.

The capital deployment is expected to grow higher, and Wells Fargo & Company (NYSE:WFC) is expected to reach on the top of the group in combined deployment next year.

The strategic plan of Well Fargo has led it to become America’s largest residential mortgage and residential institution. The U.S. housing market is recovering, and this turns out to be the positive sign for Well Fargo as it is very well positioned to capitalize upon its continuous improvement.

Return of Capital

The Well Fargo management has requested the government to improve 2013 investor return. This comprises share repurchase. The management in 2013 expects to increase the share buybacks.


For long term investors, Wells Fargo & Company (NYSE:WFC) is a good stock destined to be benefited by the recovery in the housing market. The better and focused management is assisting the bank to achieve its targets. Wells Fargo trades at a premium to its largest competitors and, importantly, is less subject to swings in its valuation.

The big banks in the U.S are disconnected from the main street economy because of their diversion towards global operations and high-end dealing. These big banks are earning profits, but the rest of the country is suffering. On the contrary, Well Fargo turns out to be an old-fashioned, small-town bank, despite its massive size. With the recovery of American economy, more people getting jobs, their increased spending on buying cars and purchasing homes will make Well Fargo prosper.

With record earnings and sound management, Well Fargo is expected to grow further in 2013. But one of the major concerns is Net Interest Margin (NIM), which fell by 10 basis points in the fourth quarter to 3.56%. But the management is confident that it will manage in the current interest rate environment.

For long term investors, Wells Fargo & Company (NYSE:WFC) is offering increased dividends, increasing earnings from the house market recovery.