October 6, 2008 / 11:13 AM / 11 years ago

UPDATE 2-Analysts raise Wells Fargo's price target

(Adds more analysts’ comments, background, share movement)

Oct 6 (Reuters) - At least two brokerages raised their price targets on the stock of Wells Fargo & Co (WFC.N), the fifth-largest U.S. bank, as the proposed merger with Wachovia Corp WB.N is expected to benefit the company expand its footprint in the U.S. and add to earnings.

Friedman Billings Ramsey and RBC Capital Markets raised their price targets on the stock of the company by $5 each to $25 and $38, respectively.

Wells Fargo agreed to buy Wachovia on Friday for about $15 billion, upstaging a government-backed Citigroup Inc (C.N) bid for Wachovia’s banking assets with a deal that would catapult it into the top ranks of national consumer banking. [ID:nN03365382]

FBR analyst Paul Miller said the transaction could add $10 billion to $15 billion of pre-provision, pretax earnings to Wells Fargo over time.

“With much of the credit costs taken through purchase accounting adjustments, the transaction is quickly accretive, even including the approximately one billion new shares that Wells Fargo will issue,” Miller wrote in a note to clients.

RBC analyst Joe Morford said the deal will build out Wells Fargo’s presence into the Southeast and the East Coast with branches in 39 states.

On completion of the deal, “Wells’ core deposits should increase by over $400 billion to $711 billion, while net loans will jump $486 billion to $904 billion,” Morford said.

Sandler O’Nell Partners, however, said on Friday that despite adjusting for the impact of a $20 billion capital raise related to the transaction, Well Fargo’s capital ratios are still expected to come under pressure.

The company Tier 1 capital ratio, a measure of profitability for a bank, will fall to 7.5 percent from 8.2 percent when the deal closes, the brokerage said.

CITI THREAT?

FBR analyst Miller, however, said Citigroup’s challenge to the deal added a level of risk and expense to the overall transaction.

Citigroup (C.N) demanded Wells Fargo drop its surprise bid, which comes four days after Wachovia preliminarily agreed to sell its banking assets to Citi for $2.2 billion with partial government guarantees on $312 billion of Wachovia’s mortgages.

“Citigroup is attempting to enforce its exclusivity agreement for Wachovia or increase its offer, but we expect that Wells Fargo should eventually prevail,” the analyst said.

Citigroup on Sunday said it won a court order blocking Wells Fargo from buying Wachovia WB.N, after the San Francisco-based bank said on Friday it would buy Wachovia in a deal worth close to $15 billion that topped Citi’s earlier bid, which was backed by the U.S. government.

RBC analyst Morford said it will be difficult for the regulators not to approve the Wells-Wachovia deal, as the offer does not need regulatory approval, removing any taxpayer exposure to future losses.

Morford said a compromise formula could be offered by the government, which will mean “Citigroup would buy Wachovia’s Northeast and Mid-Atlantic retail business, while Wells would purchase the Southeast and California branches along with the asset management and brokerage divisions.”

FBR’s Miller reduced his 2008 earnings estimate for Wells Fargo to $1.85 a share from $1.90 to reflect modestly higher credit costs and for losses on exposure to agency preferred securities and Lehman Brothers Holdings Inc, but maintained his 2009 estimate of $2.15 a share.

The analyst kept his “underperform” rating on the bank’s stock mainly on valuation.

RBC’s Morford also maintained his “outperform” rating on the stock.

Sandler O’Neill said on Friday its “sell” rating on the stock of Wells Fargo was currently under review.

Shares of Wells Fargo were down about 2 percent at $33.77 on the New York Stock Exchange. (Reporting by Anurag Kotoky in Bangalore; Editing by Amitha Rajan, Jarshad Kakkrakandy)

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