Although Wells Fargo (NYSE:WFC) certainly made its share of mistakes during the housing bubble, it looks like the company is on track to emerge from the credit crisis as one of the strongest names in banking. Strong while others are still weak, Wells Fargo could yet be on the hunt for assets and expansion opportunities that could take this bank to a new level.

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A Good End to the Year
The fourth quarter of 2011 is shaping up to have been a pretty good quarter for the large banks. Wells Fargo surprised with its revenue this quarter, growing 5% from the third quarter and beat the average estimate by about half a billion dollars.

Revenue growth was certainly helped by a 4% increase in net interest income, as Wells Fargo reported a surprisingly strong net interest margin (increasing five basis points). This bodes well for other banks like U.S. Bancorp (NYSE:USB) and PNC (NYSE:PNC) that will report a little later.

Fee income was up about 7% sequentially and a little disappointing overall, as results were spiked by a big increase in mortgage banking revenue. Wells Fargo's efficiency ratio is starting to improve (that is a measure of operating expenses), but is still lower than it could and should be. (For related reading, see Why You Should Stick With The Big Banks.)

Strong Credit
Wells Fargo's credit and capital situation is looking quite good. Net charge-offs actually declined a bit and and the bank's non-performing assets sit more or less as expected. Given that Wells Fargo did show a little more loan growth than expected, it can be argued that credit was slightly soft, but not really by a significant extent.

All in all, Wells Fargo looks to be in good shape with its capital. The bank should be able to withstand fairly harsh stress tests and this suggests that the bank should be relatively free to use its capital.

Growth Opportunities - Here or There?
One of the potential uses of that capital could be growth-oriented acquisitions. Forget about buying other banks; Wells Fargo is too big for that now. What Wells Fargo is likely targeting is the assets of stressed European banks. This bank could use more scale in wealth management and UBS (NYSE:UBS) may be willing (or have little choice but) to sell its U.S. wealth management arm (the former PaineWebber). By the same token, maybe Wells Fargo would think of a bolder move and actually consider entering certain European markets, though that seems quite dangerous today.

Different May be Better
Wells Fargo is one of the largest commercial banks in the country, with a relatively modest investment banking and trading operation. Wells Fargo certainly does engage in some of the same trading and investment banking operations as Goldman Sachs (NYSE:GS), Bank Of America (NYSE:BAC) or Citigroup (NYSE:C), but it's on a smaller scale and the company's earnings are not so beholden to the quarter-to-quarter swings in those businesses.

The Bottom Line
Wells Fargo was one of the most attractively-priced banks one quarter ago and the stock has done pretty well since then. The good news is that the Wells Fargo shares are still undervalued on the basis of an excess return model that presumes a 14% ROE in 2015. That assumption suggests that Wells Fargo is more than 30% undervalued - no longer the slam-dunk it may have once been, but still certainly cheap enough to be quite interesting. (For related reading, see 2011 In Review: Regional Banks Are Suffering.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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