Wells Fargo: Strengths, Weaknesses, Opportunities, Threats

An earnings report is a great excuse to put Wells Fargo (NYSE: WFC  ) under a SWOT-light for a look at strengths, weaknesses, opportunities and threats. Wells' report had mixed headline numbers. Earnings were up year-over-year and beat expectations, but revenue missed expectations.

Strengths:

  • Wells Fargo joined JPMorgan Chase (NYSE: JPM  ) in posting year-over-year earnings increases. Peers Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) both reported lower earnings compared to 2010's first quarter.
  • Earnings aren't dependent on trading and investment banking operations, as they were for, say, JPMorgan and Bank of America.
  • Capital ratios -- a measure of financial strength – improved slightly and the Federal Reserve approved plans to raise the dividend and buy back shares.

Weaknesses:

  • Wells Fargo doesn't have the diversified, global footprint of its big bank brethren.
  • Mortgage banking income, mortgage applications and the application pipeline were down compared to both last quarter and the year-ago quarter.

Opportunities:

  • Credit quality has been improving across the board. Fewer late loan payments will let Wells Fargo and other banks continue to release some of the loss reserves they've been carrying.
  • Wealth management is showing strong growth. Results are currently a small slice of the earning pie, but the segment grew earnings by 72% and 20% compared to last quarter and the year-ago quarter.

Threats:

  • The easy money policy at the Fed will change at some point. I don't know when, but Fed rates only have one direction to go.
  • Mortgage interest rates have been inching higher. That's likely to crimp mortgage loan demand and will decrease the value of mortgages on the balance sheet.
  • Foreclosures and repurchase demands related to problem loans continue to be a focus of political attention and legal challenges.

Mr. Market wasn't impressed with Wells Fargo's report and trimmed four percent off the shares yesterday. The report wasn't glowing, but the market reaction seems overdone. There are still problems and risks, but Wells Fargo and other banks are putting problems behind them and have better days ahead. I think Mr. Market just put one of the best banks in the country on sale.

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Fool contributor Russ Krull owns shares of Wells Fargo and Citigroup, but does not have have a financial position in any of the other companies mentioned in this article. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Through a separate Rising Star portfolio, The Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 21, 2011, at 3:18 PM, ronbeasley wrote:

    As its management has repeatedly stated, Wells' foreclosure and putback liabilities are much lower than its competitors.This article also contains another common misconception, Rising interest rates are not a bad thing, they are a positive. Wells has over $100 billion in cash and equivalents to invest, and is largely funded by low cost checking deposits. A 5% margin on that $100 billion would add $1 a share pretax. The best thing that could happen is for rates to rise with continuation of a positive yield curve.

    Billionaire investors Buffett, Tepper, and Paulson were adding to their substantial Wells holdings at close to current prices in the fourth quarter of 2010. Markets are impatient and ignoring the vast earnings power on its balance sheet. This is an enormously attractive buying opportunity.

    Wells Fargo is the largest holding in my personal and client portfolios.

    Ron Beasley

    www.rwbi.net

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