July 15, 2010

Wells Fargo & Company (WFC-NYSE)

SUMMARY
Current Recommendation NEUTRAL
Prior Recommendation N/A
04/07/2000
Wells Fargo is scheduled to announce its second
Date of Last Change
quarter earnings on July 21. The company s first
quarter earnings came in significantly ahead of the
Current Price (07/14/10) $27.66
Zacks Consensus Estimate, aided by a higher-
Target Price $29.00 than-expected growth in revenues. Capital ratios
improved significantly in the quarter with the raising
of fresh equity. We think that the company is well
positioned compared to its peers as the Wachovia
acquisition and the demise of some smaller players
helped it garner a larger share in the mortgage
markets. However, higher credit losses resulting
from a continued deterioration in the housing
markets and weak consumer trends will impact
earnings in the upcoming quarters. We reiterate
our Neutral recommendation on the stock.
SUMMARY DATA

52-Week High $33.88 Risk Level * Below Avg.,

52-Week Low $22.87 Type of Stock Large-Value
One-Year Return (%) 14.08 Industry Banks-Major Reg
Beta 1.34 Zacks Industry Rank * 119 out of 291
Average Daily Volume (sh) 38,010,888
ZACKS CONSENSUS ESTIMATES
Shares Outstanding (mil) 5,210
Market Capitalization ($mil) $144,109 Revenue Estimates
Short Interest Ratio (days) 1.26 (In millions of $)
Institutional Ownership (%) 71 Q1 Q2 Q3 Q4 Year
Insider Ownership (%) 1 (Mar) (Jun) (Sep) (Dec) (Dec)
2008 10,563 A 11,460 A 10,377 A 9,477 A 41,877 A
Annual Cash Dividend $0.20 2009 21,017 A 22,507 A 22,466 A 22,696 A 88,686 A
Dividend Yield (%) 0.72 2010 21,448 E 21,381 E 21,292 E 21,400 E 85,521 E

5-Yr. Historical Growth Rates

2011 88,426 E
Sales (%) 18.8
Earnings Per Share Estimates
Earnings Per Share (%) -15.5 (EPS is operating earnings before non-recurring items, but including employee
Dividend (%) -30.4 stock options expenses)
Q1 Q2 Q3 Q4 Year
P/E using TTM EPS 15.9 (Mar) (Jun) (Sep) (Dec) (Dec)
2008 $0.60 A $0.53 A $0.49 A -$0.84 A $0.78 A
P/E using 2010 Estimate 13.9
2009 $0.59 A $0.60 A $0.56 A $0.08 A $1.83 A
P/E using 2011 Estimate 9.4 2010 $0.50 A $0.49 E $0.52 E $0.48 E $1.99 E
2011 $2.94 E
Zacks Rank *: Short Term
1 3 months outlook 3 - Hold
Projected EPS Growth - Next 5 Years % 10
* Definition / Disclosure on last page

© 2010 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606
OVERVIEW

Wells Fargo & Company is one of the largest financial services company in the U.S. (in terms of assets)
with $1.2 trillion in assets and over $800 million in deposits. The company provides retail and wholesale
banking, mortgage banking, consumer finance, equipment leasing, insurance brokerage, agricultural
finance, securities brokerage, trust, investment banking and other financial services through banking
stores, the internet and other distribution channels to individuals, businesses and institutions in all 50
states, the District of Columbia (D.C.) and in other countries.

The San Francisco-based company, as it stands today, is the result of the 1998 merger between Norwest
Corporation and the former Wells Fargo (founded in 1852), as well as the recent merger with Wachovia
Bank. Wells Fargo is also the premier institution in the U.S. in community banking, small business
lending, middle market commercial banking, agriculture lending, commercial real estate lending,
commercial real estate brokerage and bank-owned insurance brokerage.

Wells Fargo acquired Wachovia Bank in December 2008, thereby being transformed into a premier
coast-to-coast financial services franchise providing banking, insurance, investments, mortgage and
consumer finance through almost 10,000 stores, over 12,000 ATMs and 267,300 team members across
North America and other continents.

In December 2009, Wells Fargo exited the Troubled Asset Relief Program (TARP) after a full repayment
of its $25 billion loan along with cash dividends of $1.44 billion to the U.S. Treasury while maintaining
strong capital levels. The company had entered the TARP in October 2008. The company also
purchased Prudential Financial s non-controlling interest in securities brokerage joint venture, assuring
itself 100% of the future earnings.

The company provides its services through three broad segments: Community Banking (65% of 2009
revenue), Wholesale Banking (22%), and Wealth, Brokerage and Retirement (13%).

Community Banking offers a complete line of diversified financial products and services for
consumers and small businesses including investment, insurance and trust services in 39 states and
D.C. It also offers mortgage and home equity loans in all 50 states and D.C. Wachovia has added
product offerings as well as expanded channels to better serve customers. The segment now
includes the Wells Fargo Financial division.

Wholesale Banking provides financial solutions to businesses across the U.S. with annual sales
generally over $10 million and to financial institutions globally. It provides middle market banking,
corporate banking, commercial real estate, treasury management, asset-based lending, insurance
brokerage, foreign exchange, correspondent banking, trade services, specialized lending, equipment
finance, corporate trust, investment banking, capital markets and asset management. Wachovia
expanded product offerings across the segment, including investment banking, mergers and
acquisitions, equity trading, equity structured products, fixed-income sales and trading and equity
and fixed income research.

Wealth, Brokerage and Retirement provides a full range of financial advisory services to clients.
The Wealth Management division provides affluent and high-net-worth clients with a complete range
of wealth management solutions. Retail Brokerage division s financial advisors cater to the
customers advisory, brokerage and financial needs as part of one of the largest full-service
brokerage firms in the United States. The Retirement division provides retirement services for
individual investors and is a national leader in 401(k) and pension record keeping. The Wachovia
takeover added the following businesses to this segment: Wachovia Securities (retail brokerage),

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 Wachovia Wealth Management, including its family wealth business and Wachovia s retirement and
reinsurance business.

Full Year 2009 Revenue Full Year 2009 Net incom e

(Business Segm ents) (Business Segm ents)
Wealth,
Wealth,
Brokerage
Brokerage
and
and
Retirement
Retirement
7%
13%

Wholesale
Wholesale Community Banking Community
Banking Banking 29% Banking
22% 65% 64%

REASONS TO BUY

Wells Fargo has well justified reputation as a growth stock among the large-cap banks, with cross-
selling as its key strength. Despite the ongoing weakness in housing, periodic dislocation in the
secondary mortgage capital markets and the overall challenging environment in the U.S., the
company has consistently achieved strong revenue growth in the past several quarters.

Wells Fargo has a diverse geographic and business mix that enables it to sustain consistent
earnings growth, while its strong consumer franchise allows it to offer a vast range of products to
households.

Wells Fargo s growth plans have historically included a large number of acquisitions, Wachovia
being the largest addition in December 2008. The company has demonstrated its ability to assimilate
local franchises offering a wider range of products than the acquired company could have had, thus
increasing the number of options for customers to choose from. This has been the driving force
behind its growth in the recent years.

The Wachovia merger is expected to generate an internal rate of return (IRR) of about 20% and be
accretive to earnings starting from the third year of its acquisition, without any adjustments. As a
result of the merger, Wells Fargo has substantially expanded its distribution network and has a
Community Banking presence for the first time in Alabama, Connecticut, Delaware, Florida, Georgia,
Kansas, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia and Washington D.C. During the first quarter of 2010, the company
converted 20 Wachovia banking stores in Arizona, Nevada and Illinois to Wells Fargo. The
Wachovia merger integration remained on track and is expected to realize $5 billion of annual
merger-related savings upon completion of the integration process in 2011. The company has
achieved 70% of this targeted consolidated run-rate savings.

Wells Fargo s ongoing focus on producing high risk-adjusted returns helps it to maintain strong
capital ratios. Its absolute and relative liquidity position it above its peers to take advantage of
opportunities arising from the changing market environment. Moreover, the timely exit from TARP
has helped the company save the annual preferred stock dividend payment of $1.25 billion to the
government. This is expected to be slightly accretive to earnings in 2010.

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 With a view to conserve capital in a very challenging operating environment, Wells Fargo has
slashed the quarterly common stock dividend from $0.34 to $0.05 per share on March 6, 2009. The
move will help retain an additional $5 billion in common equity each year. The company aims to
reinvest this amount in its businesses in order to gain a profitable market share in the long term
while creating a larger capital cushion in the near term against a potentially more adverse credit
cycle.

REASONS TO SELL

The combination of solid business growth, strong revenue growth and impressive operating margins
is somewhat masked by higher impairment charges as a result of continuing write-downs to the
securities portfolio and higher credit reserve builds. Following the trends in 2009, the latter is
expected to continue to be high in the coming quarters as the industry position will remain
challenging in the rest of 2010 as well.

Wells Fargo continues to experience higher credit losses as a result of its initiative to de-risk the
combined new balance sheet after the Wachovia acquisition. This strategy is aimed at reducing the
likelihood of losses in the future. We expect these factors to continue to prevail in the short-to-
medium term and hurt the earnings.

Wells Fargo s significant mortgage banking operations and considerable variability in mortgage
servicing operations may hamper P/E expansion. On the expense front, the company continues to
push for growth across the franchise by adding to its existing number of stores and team members.
These initiatives are keeping expense growth at a high level. The company may not be able to
accomplish any positive leverage in the long run if it is not able to significantly control expenses.

Credit quality continues to deteriorate though the rate of deterioration has moderated of late. During
the first quarter of 2010, nonperforming assets increased to $31.5 billion or 4.00% of total loans
compared with $27.64 billion or 3.12% of total loans in the prior quarter.

The majority of losses stem from the consumer loan portfolios as the customers continue to be
negatively impacted by the downturns in residential real estate, higher unemployment and
weakening economy. Given the continued weakness in housing and broader market, charge-offs are
expected to continue to rise through the remaining of 2010. Further, until home prices stabilize, the
company will continue to a bear huge amount of losses in the home equity portfolio.

RECENT NEWS

Wells Fargo s Beats Estimates April 21, 2010

Wells Fargo's first quarter 2010 operating earnings were $0.50 per share, well above the Zacks
Consensus Estimate of $0.42. Net income applicable to common stock came in at $2.55 billion or $0.45
per share compared to $3.05 billion or $0.56 in the prior-year quarter. This included after-tax integration
expenses of $247 million or $0.05 per share.

During the quarter, Wells Fargo earned $21.4 billion (up 2% year over year) of combined revenue, driven
primarily by 20% growth in trust and investment fees, 7% growth in insurance fees and14% growth in
processing and other fees. While total mortgage banking remained flat, results for mortgage hedging
reduced drastically.

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Net interest income for the quarter came in at $11.1 billion, down from $11.5 billion in the prior quarter.
While earning assets were down at $1.07 trillion, the decline in core loans, reduction in non-strategic
assets and mortgage-backed securities reduced net interest income growth although net interest margin
(NIM) increased to 4.27% from 4.16% year over year. However, these declines were offset by significant
growth in non-interest-bearing checking and savings deposits and wider new lending spreads, which are
expected to be beneficial for net interest income over the long term.

Total non-interest income came in at $10.3 billion, up 7% year over year, primarily due to continued
strength in trust and investment fees and insurance revenue. This was partially offset by a decline in
mortgage banking, card and deposit service charges. Non-interest expense for the quarter came in at
$12.1 billion, down from $12.8 billion in the prior quarter.

Total core deposits of $759.2 billion as of March 31, 2010 were down from $770.8 billion as of December
31, 2009. Growth in low-cost savings accounts and consumer checking accounts were offset by a decline
in mortgage escrow deposits.

Credit quality continued to deteriorate although improvement was witnessed in net charge-offs that
declined to $5.3 billion or 2.71% of average loans compared with $5.4 billion or 2.71% of average loans
in the prior quarter. However, nonperforming assets increased to $31.5 billion or 4.00% of total loans
compared with $27.64 billion or 3.12% of total loans in the prior quarter. Allowance for credit losses was
$25.7 billion as of March 31, 2010 compared with $25.0 billion as of December 31, 2009.

Net unrealized gains on securities increased to $7.4 billion from $5.6 billion as of December 31, 2009.
Wells Fargo s total assets as of March 31, 2010, were $1.22 trillion and total loans were $781.4 billion.

As of March 31, 2010, Wells Fargo shareholders equity was $116.1 billion, compared with $111.8 billion
as of December 31, 2009. Capital ratios remained strong with Tier I capital and total capital ratio at
10.0% and 13.9%, respectively, compared with 8.3% and 12.3% respectively, year over year. Book value
per share improved to $20.79, up from $20.03 in the prior quarter and $16.28 year over year.

Business Update

On July 7, Wells Fargo announced a restructuring of its consumer finance unit. The company would close
638 Wells Fargo Financial stores across the U.S., stop originating non-prime portfolio mortgage loans
and lay off 3,800 positions as part of this restructuring.

According to the company, the requirement for a separate network of Wells Fargo Financial local offices
no longer exists, following the company s 2008 merger with Wachovia. This merger has enabled
customers to have access to the company s 6,600 Wells Fargo and Wachovia community bank stores
and its 2,200 Wells Fargo Home Mortgage locations. Wells Fargo also pointed out that its financial stores
have originated less than 2% of all its real estate loans in the first quarter of 2010.

As a result of this restructuring, Wells Fargo would incur pre-tax charges of approximately $185 million in
total. Of this, around $137 million, or $0.02 per share, would be incurred in the second quarter while the
remaining charges would be reflected in the second half of the year, primarily in the third quarter.

As part of the restructuring process, the company would also shed 3,800 positions within Wells Fargo
Financial. This unit currently has 14,000 team members. Of this, Wells Fargo will abolish 2,800 positions
in the next 60 days and another 1,000 positions within a year. The other employees will be absorbed in
other Wells Fargo businesses.

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Dividend update

On April 27, 2010, Wells Fargo declared its quarterly dividend of $0.05 per share. The dividend was paid
on June 1, 2010, to stockholders of record as on May 7, 2010. On March 6, 2009, the company reduced
its quarterly dividend by 85.3% to $0.05 per share versus $0.34 per share paid earlier.

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VALUATION

The Wachovia merger has transformed Wells Fargo into the fourth largest bank in the country with an
impressive geographic diversification and a sturdy balance sheet. The company is on track with the
Wachovia merger that is expected to realize $5 billion of annual merger-related savings upon full
integration in 2011. However, the combined entity s large exposure to mortgage/real estate loans and the
integration costs associated with the merger will continue to impact its earnings throughout 2010, even
though Wells Fargo has not suffered as much from the current mortgage crisis as some of its peers due
to its disciplined lending approach.

Although there is a lot of uncertainty regarding the commercial sector especially due to the credit crunch,
regulatory and fiscal policy issues in the near term, we believe that Wells Fargo s profitability ratios, cross
selling ability, strategic Wachovia cost integration and a diverse business portfolio along with better-than-
expected growth in investment banking will drive long-term growth and add to the investors confidence.

Wells Fargo shares currently trade at 13.9x our 2010 earnings estimate, a 50% discount to the industry
average. On a price-to-book basis, the share currently trades at 1.3x which is at an 18% premium to the
industry average. The valuation on a price-to-book basis looks attractive, given a trailing 12-month ROE
which is significantly above the industry average.

Our six-month target price of $29.00 per equates to about 14.6x our earnings estimate for 2010. This
price target implies an expected return of 4.8% over that period. This is consistent with our long-term
Neutral recommendation.

The quantitative Zacks Rank for Wells Fargo is currently 3 , indicating no clear directional pressure on
the shares over the near term.

Key Indicators

P/E P/E
5-Yr 5-Yr
P/E P/E Est. 5-Yr P/CF P/E High Low
F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM)
Wells Fargo & Company (WFC) 13.9 9.4 10.0 9.3 15.9 35.5 10.7

Industry Average 27.6 13.4 5.7 16.0 19.2 40.7 8.2

S&P 500 13.8 12.0 10.7 12.4 19.3 27.7 13.8

JPMorgan Chase & Co. (JPM) 12.9 8.5 8.0 10.7 15.8 N/A 9.5
Bank of America Corporation (BAC) 15.8 8.3 6.0 12.2 N/A N/A 5.7
Citigroup Inc. (C) 13.2 9.5 -1.5 N/A N/A 32.7 8.5
US Bancorp (USB) 15.3 10.9 6.3 16.6 23.0 29.8 8.7
TTM is trailing 12 months; F1 is 2010 and F2 is 2011, CF is operating cash flow

P/B
Last P/B P/B ROE D/E Div Yield EV/EBITDA
Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM)
Wells Fargo &
Company (WFC) 1.3 2.9 0.7 12.1 1.8 0.8 8.4

Industry Average 1.1 1.1 1.1 3.4 1.5 0.9 19.5

S&P 500 3.2 10.0 2.9 21.4 2.2

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Earnings Surprise and Estimate Revision History

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StockResearchWiki.com The Online Stock Research Community
Discover what other investors are saying about Wells Fargo (WFC) at:

WFC Profile on StockResearchWiki.com

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of WFC. The EPS and revenue forecasts are the Zacks Consensus
estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal
views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly,
related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this
report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to
accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet
the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an
offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a
position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the
securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to
twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve
months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The
current distribution of Zacks Ratings is as follows on the 1020 companies covered: Outperform - 12.8%, Neutral - 80.5%, Underperform 6.0%.
Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in
earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model
assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks
Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a
company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of
investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In
determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each
th
stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest
values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the
second, third, and fourth groups of stocks, respectively.

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