Wells Fargo & Company (NYSE:WFC) is set to benefit from operational efficiency and diversified business mix, despite its mortgage banking facing pressure, according to Barclays PLC (NYSE:BCS) (LON:BARC).

Wells Fargo logo

In its recent 2Q13 EPS preview report from the equity research team, Barclays PLC (NYSE:BCS) (LON:BARC) anticipates Wells Fargo & Company (NYSE:WFC) will post second quarter EPS of $0.93 as against the consensus estimate of $0.92.

Jason M. Goldberg and team at Barclays retained an overweight rating on the banking stock.

Earlier, Wells Fargo was downgraded by Sterne, citing slowing earnings growth.

Wells Fargo Mortgage Banking Under Pressure

The analysts at Barclays feel Wells Fargo & Company (NYSE:WFC)’s mortgage banking might be under pressure thanks to lower gain on sale margins and refinance activity. They anticipate the bank’s mortgage banking revenue to post 7 percent sequential fall during the second quarter. Analysts anticipate the bank’s fee income might see a decline of 1 percent during the second quarter.

The declining mortgage origination volume and gain on sale margin are depicted in the graph below:

Barclays Wells Fargo

Jason M. Goldberg and team, however, feel the bank’s expenses would decline from a seasonally elevated first quarter, besides savings from the IFR settlement back in January.

The analysts anticipate the bank to maintain its streak of 13 consecutive quarters of strong performance of enhanced EPS.

Highest NIM Among Large-cap Peers

Justifying their rationale to maintain their overweight rating on Wells Fargo & Company (NYSE:WFC), the analysts attribute the bank’s diversified business mix, retail deposit base would help drive the bank to post highest NIM among its U.S. large-cap peers. Also, the bank is set to derive benefits from cross-selling traction and expense synergies from its WB acquisition.

On the upside, the analysts set a target price of $48 if the bank’s mortgage banking activity posts better than the MBA’s current forecast.  However, the analysts feel Wells Fargo’s share might touch $25 in case the U.S. housing market were to experience another 10 to 15 percent decline.

Successful Acquisitions

The analysts complemented Wells Fargo & Company (NYSE:WFC) for successful acquisition of U.S. assets from deleveraging European peers such as Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY), the Bank of Ireland (ADR) (NYSE:IRE) and the Irish Bank Resolution Corp. These acquisitions, according to Barclays’ analysts, propelled Wells Fargo’s asset balances by $13 billion.

Barclays’ analysts anticipate Wells Fargo to reiterate its efficiency ratio target of 55 to 59 percent, in line with its long-term target of providing 50 to 65 percent EPS return to shareholders through higher dividends and buybacks.

Jason M. Goldberg and team at Barclays also expect the bank to maintain its strong ROA (1.3 to 1.6 percent) and ROE (12 to 15 percent) targets.