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Wells Fargo (NYSE:WFC) has rarely offered investors any reason to be critical of its operation - at least relative to its "big four" peers, which include Bank of America (NYSE:BAC) and Citigroup (NYSE:C), which have had both operational battles as well as unfortunate gaffes with PR.

That said, we weren't overly impressed with Wells Fargo's first quarter earnings report, which demonstrated growth struggles. While the bank has always enjoyed a premium based on its operational performance, investors are beginning to wonder if this level of deference is still deserved.

Is Softness in Q1 Temporary?

We tried to find reasons to be excited about this quarter, but we simply couldn't. Aside from some improvements in expenses, which declined by 2% from last year's quarter, everything else was unimpressive. Granted, the issues related to the sequestration could have had a meaningful impact.

However, when compared with the 3% revenue decline by JPMorgan Chase (NYSE:JPM), Wells Fargo's 1% decline was (at best) mediocre. The good news is that revenue only declined 1% sequentially, which hurts the argument that the sequestration situation had a meaningful impact on the sluggish growth. The low interest rate environment and tighter regulation certainly didn't help.

It was also disappointing that pre-provision net revenue (PPNR), which is another way to say operating income, grew modestly at just 1% year over year. Unfortunately, however, PPNR also took a meaningful step backwards - falling 7% since the fourth quarter. By contrast, Citigroup, which has had a rash of legal struggles, outperformed Wells Fargo this quarter in several areas, including beating PPNR estimates.

For Wells Fargo, given these disappointing numbers, it comes as no surprise that the bank missed earnings due (in part) to a 33 basis-point decline in net interest margins (NIM). Here too, Wells Fargo is being outperformed by both Citigroup and JPMorgan, which posted NIM declines of just 4 basis points and 25 basis points respectively.

Where has all the growth gone?

This is the question investors are asking today, especially given the highly competitive nature within this sector, including a resurgent Bank of America, which posted a 3% sequential increase in NIM. Surprisingly, even Wells Fargo's usual areas of strength such as mortgage lending, were disappointing. The 13% sequential decline in loan originations is something that management must reverse in the second quarter.

By contrast, even though Bank of America showed a sequential weakness in mortgage banking, BofA's results still arrived in-line with Street estimates. What's more, Wells Fargo's 3% decline in overall mortgage revenue, which also fell 9% sequentially, is alarming, especially since housing starts seem to be picking up.

Unlike Citigroup and JPMorgan, which has significant exposure overseas while having other strong businesses such as investment banking, mortgage lending is especially critical to Wells Fargo's growth. The soft activity hurt any chances of core operational growth, even with an 8% increase in loan balances.

Although the higher loan balance suggests that consumers are not paying down these debts, it does, however, suggest that Wells Fargo remains a force in consumer lending, even though mortgages are down. That said, the bank still owns 30% share in the U.S. mortgage market, which far exceeds that of both Bank of America and JPMorgan.

Essentially, although there is now some weakness in Wells Fargo's mortgage business, the bank is still in good shape. Management's job, however, is to figure out ways to grow the bank's other businesses, such as credit cards and wealth management. As noted, the bank does not currently have the overseas presence that Citigroup or JPMorgan have.

While, this "deficit" also serves as an advantage for Wells Fargo to the extent that it shields the bank from the sort of fiscal challenges that Europe has experienced, it also hurts the bank's growth chances if/when Europe is fully recovered. Besides, given Wells Fargo's already strong standing in mortgage and auto loans, management has to assess how much more growth can there be in these businesses.

Saint's Common Sense

This was not a great quarter for Wells Fargo. On a relative basis, we don't think it was a disaster, either. As sub-par as this quarter was, it will take more than just one three-month period to tear down the strong reputation that Wells Fargo has built over the years. That said, we will feel much better about the bank's prospects if management can effectively use capital to find other areas of growth such as insurance, while also establishing an overseas presence.

In the meantime, at $37 to $40, we think these shares are fairly valued. But should growth improve by the second quarter in areas such as mortgages, while also reversing the declining net interest margin, this stock should trade at $45.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.