Wells Fargo Stock A Buy As Asset Cap Lifted?
Wells Fargo (NYSE: WFC) stock has risen by 3% over the last week and remains up by nearly 9% year-to-date. The recent gains come as the U.S. Federal Reserve announced last week that Wells Fargo will no longer be subject to the $1.95 trillion asset cap that was imposed on the bank’s operations following its long-running sales practices scandal.
The Federal Reserve noted that Wells Fargo had made considerable progress in addressing its past issues, particularly in areas such as governance and risk management. The $1.95 trillion asset cap had forced the bank to scale back on lending and deposit-taking, leaving it significantly behind peers such as JPMorgan Chase, which now has over $4 trillion in assets. In response, Wells Fargo shifted its strategy to focus on higher-return and less capital-intensive businesses, including investment banking and advisory services. While the cap constrained growth, it also pushed the bank to become leaner and more efficient, sharpening its focus on risk controls and operational discipline. Now, with the restriction lifted, Wells Fargo has an opportunity to grow its balance sheet and earnings by taking on more commercial deposits, which are cheaper and more stable sources of funding that can reduce overall capital costs. This, in turn, could allow the bank to reinvest in areas leveraging its larger balance sheet. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P and clocked >91% returns since inception.
Mixed Q1 Results
Wells Fargo’s Q1 results were mixed. Net income rose 6% year-over-year to $4.89 billion, while revenue declined 3%. Net interest income, a measure of what a bank earns from its lending, declined 6% year-over-year to $11.50 billion. Noninterest income, which includes investment banking fees, brokerage commissions, and advisory fees, rose 1% to $8.65 billion from last year’s $8.64 billion. The banking sector at large has struck a cautious note about the near-term outlook due to geopolitical issues, the U.S. imposition of tariffs on trading partners, and concerns about inflation.
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Inflation worries have driven up Treasury yields, with the 10-year yield standing at over 4.40%, up from 4.01% in early April, while the yield on the 30-year bond stands just under 5%. This could have a mixed effect on Wells Fargo. Higher rates and market volatility could weigh on the investment banking business, as they often lead to delays in IPO listings, mergers, and acquisition activity. However, on the lending side, higher yields widen the spread between what banks earn on loans and pay on deposits, which generally improves net interest income and profitability, although they could impact credit quality to an extent. We value WFC stock at about. $71 per share, which is slightly below the current market price. See the Trefis’ estimate for Wells Fargo’s valuation.
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