Business Segment Performance

Each of the business segments of WFC performed better during the fourth quarter compared to the previous quarter. Revenues from Community Banking surged 4.7%, while revenues from Wholesale Banking and Wealth, Brokerage and Retirement increased 2% and 4%, respectively.

Community banking revenues increased higher mortgage banking revenues and above-average quarterly equity gains. Revenues from Wholesale banking improved largely on broad business growth, including acquisition and solid loan and deposit growth. Higher brokerage transactions revenues and asset-based fees increased revenues from Wealth, Brokerage, and Retirement revenues.

Credit Quality

The bank demonstrated solid improvement in credit quality when it reported fourth quarter results. Net charge-offs as a percentage of average total loans fell from 1.21% at the end of the same quarter last year to 1.05% at the end of the most recent quarter, while allowance as a percentage of total loans declined from 2.27% to 2.19% over the same time period. In addition, non-performing assets declined by $1.5 billion during the fourth quarter.

Capital Position

At the end of the fourth quarter, the bank maintained a Basel I tier 1 capital ratio of 10.15%, while the Basel III tier 1 capital ratio estimate was at 8.18%. This is an improvement from 8.0% Basel II tier 1 capital ratio at the end of the third quarter of 2012. The Basel I tier 1 capital improved from 9.92% at the end of the linked quarter.

Conclusion

While Wells Fargo has continued to show growth in the top line, near-term headwinds will cause some revenue pressures. The net interest margin has continued to decline under the prevailing challenging situation, but the bank’s diversified business model is the key to growth. I believe expenses are elevated and need to go lower given the low interest rate environment. In the longer-term, WFC presents an excellent opportunity due to its potential merger with Wachovia. Credit Suisse has a price target of $38 on the bank, with the consensus price target at $38.92 for shares of WFC that are currently selling at $35.10. Therefore, I believe WFC presents an excellent opportunity for investors, and I recommend that they buy the stock.

The article Wells Fargo Reports Solid 4Q Earnings On Higher Mortgage Banking originally appeared on Fool.com.

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