July 16, 2012
Wells Fargo's (NYSE: WFC ) second-quarter earnings report is a good reason to give the company a once-over with an updated SWOT analysis of its strengths, weaknesses, opportunities and threats. The headline numbers were very good: record earnings per share and record net income. Here's a little more of the story.
- This quarter's net income continues a string of increases dating back to 2010's first quarter.
- Net interest income is healthy at 3.91%, matching last quarter's number.
- The Tier 1 Common Equity Ratio -- a key risk measure -- continues a string of quarterly improvements dating back to 2010's first quarter.
- Net loan charge-offs declined from the first quarter and the annualized net charge-off rate is the lowest it's been since 2007.
- Only $400 million, or less than 10%, of earnings came from releasing loan loss provisions. For reference, JPMorgan Chase (NYSE: JPM ) reported $2.1 billion, about 40%, of earnings from loan loss provision releases. Citigroup (NYSE: C ) reports its Q2 results this week, but loss provision releases made up about 40% of its first quarter earnings.
- It's a bank. Other than that, I didn't find any substantial weaknesses in the second-quarter report.
- Financial troubles may push European banks to sell off choice assets to raise capital. For example, Wells completed the acquisition of BNP Paribas' North American energy lending business and a loan portfolio from Germany's WestLB during the quarter.
- East Coast customers have fewer products per household than West Coast customers, offering a market to cross-sell to legacy Wachovia customers.
- Those opportunities from European financial troubles also come with threats. Even if direct exposure to Europe's financial markets is small, indirect threats such as weak overseas markets throwing a wet blanket over the weak U.S. recovery are difficult to predict and quantify.
- It's hard to classify a minuscule 0.19% average deposit cost as a threat, but a bump in Fed rates would raise those costs. Of course, if loan rates increased enough to maintain or increase Wells' spread, higher rates would be a positive.
Significant strengths and opportunities compared with manageable weaknesses and threats are key reasons behind my outperform CAPScall on Wells Fargo and why the bank is a core holding in my portfolio.
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