Wells Fargo: Strengths, Weaknesses, Opportunities, Threats

Wells Fargo's (NYSE: WFC  ) first-quarter earnings report is a good reason to give the stagecoach a once-over with a SWOT -- Strengths, Weaknesses, Opportunities, and Threats -- analysis. The headline numbers were mixed. Wells beat analyst estimates for earnings, but missed on revenue estimates.

Strengths:

  • This quarter's net income continues a string of increases dating back to 2010's first quarter.
  • The Tier 1 Common Equity Ratio -- a key risk measure -- is up from last quarter and from last year'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 2006.
  • The capital plan includes an increase in the quarterly dividend to $0.30 per share and a share buyback.

Weaknesses:

  • Net interest margin has dropped for three consecutive quarters. Wells' earnings report said the decline was due to lower income from variable rate sources, increases in deposits, and repricing securities. Net interest margin is likely to be under pressure as long as QE3 is in place.
  • Home loan originations, applications, and pipeline were all down from last quarter.

Opportunities:

  • Financial troubles may push European banks to sell off choice assets to raise capital.
  • At some point, the Federal Reserve's quantitative easing will be scaled back and rates will rise. If loan rates climb faster than deposit rates, the net interest margin will expand.

Threats:

  • Those opportunities from European financial troubles also come with threats. Even if direct exposure to Europe's financial markets are small, indirect threats such as weak overseas markets throwing a wet blanket over the feeble U.S. recovery are difficult to predict and quantify.
  • It's hard to classify a minuscule 0.15% 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.
  • Wells Fargo has a significant exposure to the mortgage market. Life is good as long as the housing recovery keeps rolling, but a slip wouldn't be good for business.

Slides in net interest margin and mortgage business need watching, but Wells Fargo is doing well. For comparison, JPMorgan Chase (NYSE: JPM  ) also reported on Friday, and its net interest margin is 2.37% compared to 3.48% for Wells Fargo. 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. {%sfr%}


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2362988, ~/Articles/ArticleHandler.aspx, 12/18/2014 5:40:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement