What's Next for Wells Fargo?

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Wells Fargo's (NYS: WFC) first-quarter earnings report is a good reason to give the stagecoach a once-over with an updated SWOT -- Strengths, Weaknesses, Opportunities and Threats -- analysis. The headline numbers were good -- revenue and earnings were both up compared with the previous and year-ago quarters -- and now, here's a little more of the story.

Strengths:

  • This quarter's net income continues a string of increases dating to 2010's first quarter.
  • Passing the stress test allowed for a significant increase in its dividend, which is now up to a respectable 2.7%.
  • Net interest income is up for the second quarter in a row, reversing or at least stabilizing a declining trend.
  • Non-interest expenses are projected to fall by more than $1 billion this year as the Wachovia integration wraps up and cost reductions take hold.
  • The Tier 1 Common Equity Ratio -- a key risk measure -- continues a string of quarterly improvements dating to 2010's first quarter.

Weaknesses:

  • About 10% of income -- $400 million -- was from the release of loan loss provisions. Improving loan quality supports that release, but tapping the provisions honey pot isn't a sustainable source of income. For comparison, JPMorgan Chase (NYS: JPM) got a $1.8 billion kick, or about one-third, of its earnings from loan loss releases, and Citigroup (NYS: C) boosted income by $1.2 billion from provision releases accounting for nearly 40% of earnings.

Opportunities:

  • Financial troubles may push European banks to sell off choice assets to raise capital. For example, Wells Fargo expects to close the acquisition of BNP Paribas' North American energy lending business this month.
  • East Coast customers have fewer products per household than West Coast customers, offering up 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 that could throw a wet blanket over the U.S. recovery -- are difficult to predict and quantify.
  • Federal Reserve Chairman Ben Bernanke says the easy-money spigot will stay open for quite a while, but that will change at some point. Fed rates have only one direction to go, and rising interest rates are typically not good for bank earnings.

Significant strengths and opportunities compared with manageable weaknesses and threats are key reasons behind my outperform CAPScall on Wells Fargo, and they're also a reason the bank is a core holding in my portfolio. The stock has had a nice run over the past several months, but it pulled back a bit following a good earnings report. If that pullback holds, I plan on adding to my position once the two-day waiting period in the Fool disclosure policy is over.

At the time this article was published Fool contributor Russ Krull has a few tickets to ride the Wells Fargo stagecoach and owns shares of Citigroup. You canfollow his CAPS picks.The Motley Fool owns shares of JPMorgan Chase, Citigroup, and Wells Fargo and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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