Wells Fargo delivered impressive Q2 results yesterday given the current attrocious environment for financials. But the performance wasn’t enough for FBR, which reiterates its Underperform rating.
FBR also lowered its price target from $23 to $20 on the concern that WFC still has too much leverage on its balance sheet, which will eventually have to be written down. Additionally, FBR is critical of WFC’s dividend raise, which it thinks was imprudent given legitimate capital concerns:
WFC reported a better-than-expected 2Q08, but our outlook for the company is not materially changed, as we expect continued elevated credit costs and a smaller contribution from mortgage and trading activities in future periods. WFC is highly profitable and has strong capital ratios, but we are concerned that the company added leverage to its balance sheet (WFC added $9.6 billion of AFS securities and $13.6 billion of ST borrowings in 2Q08) and raised its dividend 10% in an environment where the more prudent step would be to conserve capital.
FBR argues that, while WFC’s capital levels are “healthy,” WFC doesn’t have a large enough reserve of capital to fall back on should credit woes continue to worsen. Increasing its dividend doesn’t help matters:
Capital levels remain healthy, but we would be more comfortable without growth in leverage or dividends. WFC’s allowance equals 1.88% of loans, which we consider under-reserved, as we expect annualized NCOs will exceed this level next quarter. Continued additions to its loan loss allowance will weigh on earnings. We reiterate our FY08 operating EPS estimate of $1.90 and adjust our 2009 estimate to $2.15 (from $2.20). WFC remains one of the best financial institutions under coverage, but our Underperform rating is based on relative valuation to its peer group.
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