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Wells Fargo Investor Payoff Requires Warren Buffett-Like Patience

Tickers in this article: BAC JPM WFC

Smead, who also owns JPMorgan and Bank of America shares, said Wells Fargo's risk reward relationship compares favorably to large cap banking peers in a normal economy.

In addition to a careful eye on interest margins and loan growth, Stifel Nicolaus analyst Christopher Mutascio said the bank's efficiency ratio and reserve releases are an important investor issue. Recently, Wells Fargo abandoned an expense target of $11.25 billion a quarter for a ratio of between 55% to 59% of overall revenue, as a result of surging housing market and refinancing activity.

Mutascio expected that after reserve releases fell through 2012, the quarterly releases could stabilize at between $150 million and $200 million through 2013 and 2014.

Releases of $250 million beat estimates, while Wells Fargo's efficiency ratio, excluding one-time items, fell sharply to 54%. "We put the core operating efficiency ratio at 54%... This is a positive," wrote Mutascio, in a note assessing earnings.

Given Wells Fargo's above industry average stock and earnings performance in recent years, some Wall Street analysts recently saw reason to downgrade their outlook for the bank, citing value at competitors Bank of America and Citigroup.

Betsy Graseck, a banking analyst with Morgan Stanley downgraded Wells Fargo from 'Outperform' in late December, citing "less ability to improve its best-in-class expense ratio and already high loan growth."

Such near-term earnings and valuation concerns relative to lenders like Bank of America and Citigroup, who remain far below pre-crisis levels, aren't likely to phase Wells Fargo's largest investor Warren Buffett.

"Nine years from now I would think that Bank of America as well as Wells Fargo (WFC) and probably the other major banks will be worth considerably more money than they are now,' said Buffett in a Thursday interview on Bloomberg TV .

That perspective might serve Wells Fargo and banking sector investors, in the wake of mixed near-term earnings signals and continued overall market share gains in mortgage and community banking.

In the fourth quarter, Wells Fargo recorded a $644 million charge for a Monday foreclosure settlement agreed with the Federal Reserve and Office of Comptroller of Currency (OCC), which has the bank committing a total cash payment of $766 million and a further $1.2 billion for already provisioned for foreclosure prevention.

For more on the foreclosure settlement, see why lenders were slow to detail the cost to investors .

Here's a look at why any of Wells Fargo's earnings troubles were hidden in plain sight ahead of the Friday report.

-- Written by Antoine Gara in New York