We maintain a Neutral recommendation on the shares of Wells Fargo.

Investors have welcomed the positive surprise and the stock has already surged more than 21% today amid higher-than-usual volume of almost 210 million, compared to the average of 163.9 million.

The nation's second-largest home lender expects revenues to grow 16% year-over-year to $20 billion during the quarter.

Wells Fargo also stated that Wachovia Corp, which the former acquired for $12.5 billion, has performed better than expected.

The US bank, which received $25 billion in bailout funds, lowered the quarterly dividend last month by 85% to 5 cents a share in an effort to save $5 billion annually.

Although analysts have pulled back on earnings estimates for this year by 13 cents over the past week, today's positive surprise could lift their expectations over the next several weeks.

Wells Fargo is a Zacks #3 Rank ("Hold") stock.

Wells Fargo & Co. (WFC) shares advanced by about 17% on Friday after the company joined other major banks by slashing its dividend payout to shore up capital as a buffer against future credit losses.

Wells Fargo lowered its quarterly dividend by 85% to 5 cents a share in a widely expected move that will help the fourth-largest U.S. bank save $5 billion annually. The company also said it plans $2 billion in additional cost cuts in 2009, starting in the second quarter, excluding job eliminations.

The San Francisco-based bank announced that its operating results in January and February had been “strong” as it made $59 billion in mortgage loans in the two months, up from $50 billion in the entire fourth quarter.

Although Wells Fargo has long been considered one of the stronger players in the banking sector, the stock has been slumping since the beginning of this year amid growing scrutiny from regulators and concerns over its once-strong balance sheet. The stock has lost a quarter of its value this week alone.

Today's move might help Wells Fargo absorb more losses related to its acquisition of Wachovia Corp and repay the federal capital investment as soon as practical. The dividend cut will boost its tangible common equity ratio by 40 basis points.

Wells Fargo shares were up 11% to $9.03 at noon on the New York Stock Exchange.

Wells Fargo & Co. (WFC) posted a surprise quarterly loss on Wednesday but its share price still gained 25% as the second-largest U.S. home lender retained its dividend and said it would not need more federal aid to absorb the troubled Wachovia Corp.

For the fourth quarter, Wells Fargo reported a net loss of $2.55 billion, or 79 cents per share, compared with a profit of $1.36 billion, or 41 cents, a year ago. Excluding numerous charges, it had a profit of 41 cents, topping the consensus estimate of 34 cents.

Wells Fargo Chief Financial Officer Howard Atkins said that a $5.6 billion credit reserve and the $3.9 billion provision related to the Wachovia takeover had led to the quarterly loss. The company also took charges of $294 million as some of its customers affected by Bernard Madoff's alleged Ponzi scheme were unable to pay their loans.

In spite of the quarterly loss, the company maintained its quarterly dividend of 34 cents per share, putting to rest speculation that it might need to slash its distribution in order to improve liquidity. Wells Fargo said it didn't need more taxpayer funds in addition to the $25 billion it has already received to avert the ongoing financial crisis.

Wells Fargo, along with JP Morgan Chase (JPM), are widely viewed as the two banks that are holding up better than their peers in the current downturn. Wednesday's update from Wells Fargo, coupled with hope that the Obama administration may absorb toxic assets, sent the shares up as high as $20.50 at midday on the New York Stock Exchange.

Pershing Square Capital 13F Holdings

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• Wachovia Corp (WB)
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“Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term,” Jennifer Blanke, director of the WEF’s global competitiveness network told The Financial Times.

And the United States is at the top. That’s the good news.

The bad news is that the safety of U.S. banks dropped to 40th this…

• American retirement plans have lost as much as $2 trillion, or 20% of their value, in the past 15 months, Peter Orszag, head of the Congressional Budget Office estimated yesterday (Tuesday). "Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working," Orszag said.

• EBay Inc. (EBAY) said yesterday (Tuesday) that it will cut 10% of its work force and spend $1.3 billion to buy online payment and classified companies, in an effort to offset a slowdown in its web auctions business. The reduction is expected to incur restructuring charges of about $70 million to $80 million, but then save $150 million annually.

• Eli Lilly & Co. (LLY) yesterday (Tuesday) announced it will pay $62 million to 32 states and Washington D.C. to resolve an investigation into its marketing practices, The Associated Press reported. Lilly was accused of marketing its top-selling drug Zyprexa for off-label uses and inadequately disclosing the drug’s side effects to health care providers.

• Morgan Stanley (MS) and Japan’s Mitsubishi UFJ Financial Group Inc. (ADR: MTU) have received regulatory approval for the Tokyo-based bank’s $9 billion investment in the Wall Street firm. The U.S. Federal Reserve and other global regulators approved the deal, MarketWatch reported. Morgan Stanley also received antitrust approval from the U.S. government.

• The International Monetary Fund (IMF) predicted a worldwide economic slowdown in a report prepared for a Group of Seven meeting. “The global economy is entering a major downturn,” the IMF said in the report, dated Oct. 4 and obtained by Bloomberg News. “Many advanced economies are now close to recession, while emerging economies are also slowing rapidly.”

• Wells Fargo & Co. (WFC) will likely buy the bulk of Wachovia Corp. (WB) deposits, Reuters reported, citing an unnamed source. Citigroup Inc. (C) is expected to get 20% - 25% of Wachovia’s total deposits, with the remainder going to Wells Fargo, the news service reported, but cautioned that talks are ongoing and no deal has been finalized.

Source: Global Investing Roundups Wednesday, October 8th, 2008

The three banks jointly pledged to “cooperate in good faith to agree among themselves to secure orders where necessary in all applicable cases in all jurisdictions,” according to a statement from Wachovia.

The agreement was reached after consultations with the U.S. Federal Reserve, Bloomberg News reported. The “litigation standstill” will be in effect until noon EDT tomorrow (Wednesday).

Earlier in the day, Citigroup had filed suit against Wells Fargo and Wachovia for $60 billion in damages for breaching the exclusive negotiation period Wachovia had agreed to as part of Citigroup’s original offer for Wachovia’s retail banking operations.

It was the culmination of a day of legal wrangling, as Wachovia won an injunction in North Carolina state court to halt Citigroup from delaying the merger agreement with Wells Fargo.

Meanwhile, in New York, Citigroup’s court order, granted over the weekend to extend the exclusive negotiation period, was overturned in state appeals court. Citigroup promised to appeal the motion.

Wells Fargo’s $15 billion, or $7 a share, offer for all of Wachovia operations easily trumps Citigroup’s $2.16 billion, or $1 per share, offer for just Wachovia’s deposits, loan portfolio, and retail banking branches. The Citigroup offer did not include Wachovia’s A.G. Edwards brokerage unit or Evergreen Investment Management Co. LLC mutual fund family.

But as part of its agreement with Citigroup, Wachovia agreed to exclusive negotiation rights through Monday, Oct. 6. Wells Fargo’s offer was accepted on Friday, Oct. 3.

"We’re all working together with regulators… to come to a solution and outcome that serves the public interest, and I think we will have one today," Sheila Bair, head of Federal Deposit Insurance Corp., said at a banking economics conference yesterday, Reuters reported.

While the FDIC is not formally involved in the negotiations, it is working with all parties involved to reach a mutually beneficial agreement.

Hedge fund investor, William Ackman, who holds approximately 170 million shares of Wachovia, feels the Charlotte-based bank is more valuable if its retail banking business is sold separately from its asset management and brokerage divisions.

“This company is worth more, in our view, if it’s broken into pieces,” Ackman said, Bloomberg News reported. “It’s worth more because of the tax benefits created from the separation. It makes sense for Citi to continue buying the banking subsidiary and it makes sense for somebody else to buy the holding company.”

Another proposal divides Wachovia’s retail branches along geographic lines with a portion going to each San Francisco-based Wells Fargo and New York-based Citigroup.

Source: Temporary Litigation Halt as Citigroup and Wells Fargo Continue to Vie for Wachovia

The Dow gained back more than half its record Monday loss, climbing 485.21 points, or 4.68%, to close at 10,850.66. The broad Standard & Poor’s 500 Index gained 58.35 points (5.27%), to hit 1,164.74. And the tech-heavy Nasdaq Composite Index zoomed 98.60 points (4.97%), to close at 2,082.33.

"There are at least some hints of optimism that something will still happen soon with regards to the [bailout] bill," Jim Dunigan, managing executive of investments at PNC Wealth Management (PNC) in Philadelphia, told Reuters. "It’s not surprising with the washout [Monday] that you’d get some bounce-back [yesterday], both due to bargain hunters and some prospects of a resolution. All eyes are still on Washington."

In related developments yesterday:

• U.S. Senate leaders announced late Tuesday that their chamber plans to vote on a Wall Street bailout package tonight (Wednesday).  Any plan will include souped-up deposit coverage, which is already being sought by the Federal Deposit Insurance Corp. (FDIC).
• Earlier in the day, President George W. Bush and Senate leaders of both parties publicly vowed to push for a quick approval of a new financial bailout plan, despite the surprise Monday move by the House of Representatives to reject the pact that the Bush administration had negotiated with both parties in Congress. In a speech broadcast from the White House, President Bush urged lawmakers to avoid a potential economic crash, stating that "we are at a critical moment for our economy. Congress must act," the International Herald Tribune reported.
• Indeed, the Federal Deposit Insurance Corp. (FDIC) said it will ask Congress for permission to at least temporarily insure greater amounts of deposits for each depositor at member banks. The FDIC right now insurances individuals’ deposits of up to $100,000 and retirement accounts up to $250,000.
• The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, sources familiar with the issue reported. Although the SEC and the Financial Accounting Standards Board (FASB) yesterday issued “clarifications” on how banks should interpret existing rules requiring them to review assets each quarter and report losses if values decline, an actual moratorium isn’t being considered.
• Presidential candidates John McCain and Barack Obama called upon Congress to keep working on a financial-markets rescue plan and also pushed for an increase in FDIC deposit insurance as a short-term step to restore consumer confidence in the U.S. financial markets.

Foreign Market Reaction

Although the House rejection of the bailout legislation led to the crash-like 777-point drop in the blue-chip Dow index on Monday, reactions in the global markets were mixed yesterday.

In Asia, Japan’s Nikkei 225 Index plunged more than 4% to a new three-year closing low after shedding 483.75 points to close at 11,259.90. But Hong Kong’s blue-chip Hang Seng Index inched up 0.8% as it gained 135.53 points, to close at 18,016.20. Even with the slight gain, yesterday marked the end of the worst quarter for Hong Kong shares since 2001.

"It looks like Congress is going to be up in arms about this for a while but there are hopes that there may be other moves from authorities such as a rate cut from the Fed," Yutaka Miura, deputy manager at Shinko Securities, told Reuters.

In Europe, bourses gained on the revived U.S. markets and government interventions into failing banks. The FTSEurofirst 300 index gained 1.6%, fueled by the strong early-morning gains in the United States. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted gains on hopes of a new bailout plan.

The London Interbank Offered Rate, or LIBOR, surged to a record high of 6.88% yesterday, the British Bankers’ Association said. LIBOR is the rate banks charge each other for overnight lending. Such a high rate - well above the Federal Funds rate of 2.0% - demonstrates the high level of risk-aversion currently in the market.

Central banks flooded the markets with short-term liquidity yesterday, but could do little to restore financial firms’ faith in lending.

"Come Thursday, when the package is presented again to the U.S. House, many of the same people who voted against it earlier today will change their minds because of the pressure coming from the markets," Stephen Roach, chairman of Morgan Stanley Asia Ltd. (MS) said at a seminar in Hong Kong Monday, Bloomberg News reported.

Continued Bailout Hopes

Both the U.S. House and Senate were adjourned yesterday for the Jewish New Year holiday. The Senate will reconvene today - with members intending to actually vote on a new package tonight - while the House will gather again tomorrow (Thursday).

Despite the legislative holiday break, the executive branch continued its full-court press to get the bailout legislation passed.

"I realize this is a difficult vote for members of Congress," President Bush said the White House address yesterday. "But the reality is that we’re in an urgent situation and the consequences will grow worse each day if we do not act."

U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. also tried to underscore the benefit to the average American, and not just Wall Street bankers, as he lobbied politicians to move forward with the proposed bailout, Bloomberg reported.

"Markets around the world are under stress, and that reduces the availability of credit that businesses across America use to meet payroll and to purchase inventories," Paulson said to reporters gathered outside the White House. "Families, too, feel the credit crunch as it becomes more difficult to get car loans or student loans."

More Bank Bailouts

European governments stepped in again to aid more ailing financial institutions yesterday. In a united effort, Belgium, France and Luxemburg earmarked $9.2 billion (6.4 billion euros) in emergency cash for Dexia SA (PINK: DXBGF).

"Due to the significant deterioration in the business and market environment and the financial distress of a number of financial services companies, Dexia made a careful assessment of its situation and decided to take decisive action," the bank said in a statement, MarketWatch reported.

In Ireland yesterday, in a bid to stabilize sinking bank shares, the Irish Finance Ministry pledged to back deposits for two years with taxpayer funds if necessary. The move pushed Irish financial stocks higher.

Iceland nationalized its third-largest bank, Glitnir, on Monday, which sent the Icelandic crown diving to a new low against the euro. Also on Monday, banks in Belgium, Germany and Britain received government aid.

In the United States, Citigroup Inc. (C) purchased the retail banking assets of Wachovia Corp. (WB). The shares of both domestic banks enjoyed major gains yesterday, with Citi’s stock climbing 15.6% to close at $20.51, and Wachovia’s shares advancing 90.22% to close at $3.50.

Source: Credit Crisis Update: U.S. Stocks Notch Record Gains on Investor Hopes for a New Bailout Plan