Wells Fargo: Strengths, Weaknesses, Opportunities, Threats

Wells Fargo (NYSE: WFC  ) joined the big-bank earnings parade by beating the average estimate by just a penny and reporting revenue roughly in-line with estimates. Even though results weren't much of a beat, Mr. Market liked the story and bumped the price of a stagecoach ticket more than 5% by day's end.

The Wells Fargo report follows an earnings beat by JPMorgan Chase (NYSE: JPM  ) , strong numbers by Citigroup (NYSE: C  ) , and Goldman Sachs' (NYSE: GS  ) mix of strong earnings, lower trading revenue, and job cuts. Bank of America's (NYSE: BAC  ) billions in charges to settle mortgage claims make a strong case for naming Countrywide the worst business acquisition in history.

Strengths:

  • Earnings increased compared with last quarter and the same quarter last year.
  • Tier 1 capital and common ratios continued a string of increases dating back to December 2009.
  • Credit quality measured by provision expenses, nonperforming assets, and early delinquencies is improving.
  • Cost reduction initiatives are expected to cut more than $1 billion in quarterly operating expenses by the end of 2012.
  • There's now a stock buyback plan and a real dividend, not just a token to avoid getting kicked out of equity income funds.

Weaknesses:

  • Wells Fargo doesn't have the diversified, global footprint of its big-bank brethren.
  • $1 billion of the earnings came from credit loss allowance releases. The allowance reduction is reasonable considering improving loan quality, but it isn't sustainable over the long run.
  • The net interest margin -- the spread between what the bank pays for money and what it earns on loans -- has been slowly decreasing over the past year.
  • Wells Fargo trades at a premium to its peers based on price-to-tangible book ratio.

Opportunities:

  • Improving loan quality trends should allow credit loss allowance releases to continue for a while.
  • West Coast operations have a higher cross-sell-number of products per customer than legacy Wachovia customers, which presents an opportunity to grow business by selling to existing customers.

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.
  • New banking regulations could crimp income.
  • A weakening economy would threaten the improving loan quality trend.

There are still problems and risks, but Wells Fargo's business is improving, and I believe there are better days ahead.

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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 Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on 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 we can bank on.


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