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When regulators placed an unprecedented asset cap on Wells Fargo in 2018, executives assured analysts and investors that it would only be temporary, lasting about a year.
However, five years later, the cap still remains. This cap restricts the US’s fourth-largest bank from expanding its balance sheet beyond its 2017 year-end level of $1.95tn. The consequences of this cap have been significant, casting a shadow over the bank’s stock performance.
Nevertheless, there are indications that the cap may be lifted in the near future. Investors who attended a recent public presentation given by management should prepare themselves accordingly.
Under the leadership of CEO Charlie Scharf, Wells Fargo has made strides in resolving the internal issues that led to a series of scandals. The bank has streamlined its home lending business, divested its asset management division, and paid billions of dollars in penalties and settlements.
Additionally, Wells Fargo has focused on enhancing its core retail lending business and has benefited from the higher interest rate environment. In the second quarter, it reported a net interest margin of 3.09%, up from 2.39% the previous year. The bank has also raised its outlook for net interest income, which is now projected to grow by 14% this year compared to the previous estimate of a 10% increase. Cost control measures have also helped reduce the efficiency ratio from 75% to 63%.
Wells Fargo’s return on average tangible common equity stands at a robust 13.7%. Furthermore, the bank appears well-positioned to meet stricter capital requirements under the new Basel III standards, with a common equity tier one ratio of 10.7% exceeding the regulatory minimum of 8.9%.
Despite these improvements, Wells Fargo’s stock price remains 37% below its pre-asset cap highs in 2018, while competitors like Citigroup, Bank of America, and Truist Financial are trading below their book values. This indicates potential for upside once Wells Fargo is finally released from its asset cap restrictions.
The Lex team is eager to hear your thoughts. Please share your opinion on whether you believe the Wells Fargo asset cap will be lifted in the comments section below.
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