Wells Fargo Stock: What If the Asset Cap Is Lifted?

Wells Fargo’s stock (NYSE: WFC) has gained close to 51% year-to-date, as compared to the 28% rise in the S&P 500 index over the same period. In comparison, Wells Fargo’s peer, Bank of America (NYSE: BAC), is up 42% year-to-date. So what are some of the factors driving WFC stock higher this year, and what lies ahead for the company? 

While Wells Fargo has seen a strong performance this year, its performance has been mixed in the recent past. Returns for the stock were 61% in 2021, -12% in 2022, and 23% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Recent Financial Performance

Wells Fargo reported better-than-expected results for Q3 2024, with total revenues at $20.4 billion, down about 2% year-over-year. The decline was primarily due to an 11% drop in net interest income, which the bank has attributed to higher funding costs as customers have migrated to higher-yielding deposit products. Net profits also fell 11% year-over-year to $5.1 billion, due to lower net interest income. That said, the company has been diversifying its revenue sources. Non-interest-related income was up 12% year-over-year during Q3. The wealth and investment management segment performed particularly well, posting a 13% increase in non-interest revenue, driven by higher asset-based fees from higher market valuations as well as increased brokerage transaction activity. The bank also said that its fee-based revenue expanded 16% during the first nine months of the year.

Lifting of Asset Cap On Cards?

Looking ahead, things could get better. The company’s net interest income could improve going forward driven in part by the Federal Reserve rate cuts which started in September. Separately, the election of Donald Trump to the U.S. presidency for a second term is also expected to benefit the financial sector at large. Investors are betting that the Trump administration’s focus on deregulation could translate into a more lenient approach to bank oversight versus the Biden administration, with antitrust-related rules also potentially easing. This could help banks boost their revenues, via higher deal volumes, and lending activity, as well as possibly lower compliance costs which could boost profitability. Trump has also been in favor of tax cuts, which could also help the bottom lines of banks such as Wells Fargo.  Overall, lower interest rates and more political certainty post-election could spur investment banking activity, with increased debt and equity issuances with M&A-related activity also poised to increase.

Wells Fargo, in particular, could stand to benefit if regulators ease the $1.95 trillion asset cap that was imposed upon the bank in 2018 following its fake account scandal. The cap had made the company scale back on lending and taking deposits, putting it well behind counterparts such as JPMorgan Chase, which now has over $4 trillion in assets, and Citi whose assets total close to $2.4 trillion. Following the scandal, Wells Fargo tweaked its strategy focusing on higher-return businesses as well as less capital-intensive businesses like investment banking. Easing the cap could help the company grow its balance sheet and earnings after years of being constrained. We value Wells Fargo stock at about $67 per share which is slightly below the current market price. See the Trefis’ estimate for Wells Fargo’s valuation

[1] Returns as of 12/10/2024
[2] Cumulative total returns since the end of 2016

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