Wells Fargo (NYSE: WFC) stock has increased by 3% over the past week and is up nearly 9% year-to-date. The recent uptick follows the announcement from the U.S. Federal Reserve last week stating that Wells Fargo will no longer be bound by the $1.95 trillion asset cap enforced on the bank’s operations due to its prolonged sales practices scandal.
The Federal Reserve highlighted that Wells Fargo has made significant strides in rectifying its previous issues, especially in governance and risk management areas. The $1.95 trillion asset cap had compelled the bank to limit its lending and deposit acceptance, resulting in it falling considerably behind competitors like JPMorgan Chase, which currently holds over $4 trillion in assets. Consequently, Wells Fargo altered its strategy to concentrate on businesses that yield higher returns and are less capital-intensive, such as investment banking and advisory services. Although the cap restricted growth, it also motivated the bank to become leaner and more efficient, enhancing its emphasis on risk management and operational discipline. Now that the limitation is removed, Wells Fargo can expand its balance sheet and earnings by acquiring more commercial deposits, which offer less expensive and more stable funding sources that can lower overall capital costs. This could enable the bank to reinvest in areas that benefit from its larger balance sheet. Separately, if you are seeking upside potential with a more stable experience than an individual stock, consider the High Quality portfolio, which has outperformed the S&P and achieved >91% returns since inception.
Mixed Q1 Results
Wells Fargo’s Q1 figures were mixed. Net income grew by 6% year-over-year to $4.89 billion, while revenue decreased by 3%. Net interest income, a measure of the earnings from lending activities, fell by 6% year-over-year to $11.50 billion. Noninterest income, which encompasses fees from investment banking, brokerage, and advisory services, rose by 1% to $8.65 billion compared to last year’s $8.64 billion. The banking industry has generally adopted a cautious stance regarding the near-term outlook due to geopolitical uncertainties, the U.S. imposing tariffs on trading partners, and concerns about inflation.
Fears of inflation have pushed Treasury yields higher, with the 10-year yield exceeding 4.40%, up from 4.01% in early April, while the yield on the 30-year bond stands just below 5%. This may yield mixed consequences for Wells Fargo. Rising rates and market fluctuations could negatively impact the investment banking sector, as these factors frequently result in delays in IPOs, mergers, and acquisition activities. However, on the lending front, higher yields increase the gap between what banks earn from loans and what they pay on deposits, generally improving net interest income and overall profitability, although they could also affect credit quality to some degree. We assess WFC stock to be worth around $71 per share, which is slightly under the current market valuation. Refer to Trefis’ estimate for Wells Fargo’s valuation.