Wells Fargo: Strengths, Weaknesses, Opportunities, Threats

Wells Fargo's (NYSE: WFC  ) third-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 solid, with record net income and earnings results that beat analyst estimates. But the market greeted the report with a big yawn, and shares were down a penny on the day.


  • This quarter's net income continues a long string of record quarterly income.
  • Net loan charge-offs declined from last quarter and the year-ago quarter.
  • Net interest income was up compared to the year ago and previous quarters.
  • Loans were up $29.7 billion year over year and $10.3 billion compared to the second quarter.
  • Stock repurchases reduced the outstanding share count by 28.4 million, with more to come this quarter.


  • Net interest margin continued ratcheting lower to 3.38%. The driving factor is an increase in deposits. Net interest income was up slightly from last quarter and compared to the year-ago quarter.
  • Without a $900 million reserve release, the string of record earnings would have been broken. But the release is supported by improving credit quality.
  • Home mortgage originations, applications and the pipeline were down significantly compared to any of the previous four quarters.


  • At some point, the Federal Reserve will raise short-term rates and scale back on QE. If loan rates climb faster than deposit rates, the net interest margin will expand.
  • An improving economy, even slowly improving, offers opportunities to make more auto, business, home improvement, and other loans. It also means loan losses should continue to decrease.


  • It's hard to classify a minuscule 0.12% average deposit cost as a threat, but a bump in short-term 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. The home purchase market is holding up, but refinancing is down substantially with this year's increase in rates.

The mortgage business:
This year's run up in mortgage rates has taken a toll on Wells Fargo's mortgage business. The chart below shows the break down between refinance and purchase mortgages. As you can see, the purchase market is holding up reasonably well, but refinance has fallen off quite a bit as rates have ticked up. It was a similar story at JPMorgan Chase (NYSE: JPM  ) , where mortgage originations were down 17% from the previous quarter, but purchase originations were actually up 57%. The relatively steady purchase activity is a good sign for the economy. Home construction, remodeling, and appliance and furniture sales all benefit from home sales and help maintain some growth in a struggling economy.

Source: Wells Fargo 2Q& 3Q 2013 Quarterly Supplement and author's calculation.

I think Wells Fargo's diversified business will continue to pick up the slack from the mortgage business running into interest rate headwinds. 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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