Wells Fargo: Buffett's favorite bank

A long-standing holding of Berkshire Hathaway, the bank is outperforming its bigger rivals.

By TheStockAdvisors Jan 24, 2012 2:35PM
Image: Piggy bank (© Photos.com/Jupiterimages)By Geoffrey Seiler, BullMarket.com

Wells Fargo (WFC) reported its fourth-quarter results last week and the Warren Buffett favorite beat its big bank rivals. Overall, this was a solid quarter for the San Francisco bank, and we understand why Buffett likes it.

It reported a 20% increase in net income that matched the expectations of Wall Street and generated more revenue than was expected, aided by strength in its mortgage business.

Wells Fargo reported $3.89 billion in net income for the quarter, equal to 73 cents per share, compared with $3.23 billion, or 61 cents per share, in the year-earlier period. Full-year net income was $15.9 billion, or $2.82 per share, up 28% from 2010. Wall Street analysts were expecting WFC to reported earnings per share of 72 cents on $20.01 billion in revenue.

The bank reported improvement in some key metrics. Its total loan portfolio grew by $9.5 billion in Q4 to $769.6 billion, with the core loan portfolio up by $13.5 billion since September 30th, 2011. Its core checking and savings balances grew by nearly $31 billion during the quarter.

Wells Fargo has been a long-standing holding on Berkshire Hathaway's Recommended List. As of the end of Q3, Buffett had over 361 million shares of Wells Fargo in Berkshire's portfolio, making it the bank's largest holder with 6.85% of the outstanding shares. He added to his position during the quarter.

Wells Fargo is much less dependent on capital markets activities like trading than J.P. Morgan Chase and Citigroup.

An expanding loan portfolio can still be lucrative in the current environment given banks can borrow from the Federal Reserve at nearly zero percent interest. Even if they lend at lower rates than in recent years, banks can still enjoy good margins, as most of them aren't paying their depositors much for their money.

WFC trades at about 1.6 times its tangible book value, which looks like a fair price in the near term after a solid run from around the $23 level in late November. Longer term, we think the stock has more upside.

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