Wells Fargo: Strengths, Weaknesses, Opportunities, Threats

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.

Strengths

  • 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.

Weaknesses

  • It's a bank. Other than that, I didn't find any substantial weaknesses in the second-quarter report.

Opportunities

  • 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.

Threats

  • 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.

Fool contributor Russ Krull has a few tickets to ride the Wells Fargo stagecoach and owns shares of Citigroup and Wells Fargo. You can follow his CAPS picks here.

The Motley Fool owns shares of JPMorgan Chase and Citigroup. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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