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Up until this year, Wells Fargo had been operating under several consent orders and a very restrictive asset cap.
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With those now removed or terminated, the bank has achieved higher returns, and management has even higher ambitions.
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Wells Fargo also has significant excess capital.
Just seven years ago, Wells Fargo (NYSE: WFC) was embroiled in one of the largest banking controversies in history, still reeling from its phony-accounts scandal and facing an asset cap imposed by the Federal Reserve at the start of 2018. In 2020, the stock price dropped into the low $20s, and the bank also had to cut its dividend by 80%, due to rules imposed by the Fed at the beginning of the COVID-19 pandemic.
Today, the stock trades at an all-time high, just below $90 per share. The asset cap has been removed, and banking regulators have terminated numerous other consent orders imposed on the bank following its scandal.
CEO Charlie Scharf, who came aboard in 2019, has cleaned up the bank’s many regulatory issues and installed a new regulatory infrastructure. He also sold off non-core businesses, significantly cut expenses, and ramped up capital-light businesses, such as investment banking and credit card lending.
Now, the bank is at long last on offense. Here are two tailwinds behind the banking giant.
Wells Fargo’s hard work has paid off, and the bank recently achieved management’s return target, having generated a 15% return on tangible common equity (ROTCE) year to date. Now, Scharf is ready to take it to the next level, suggesting the bank could achieve a 17% to 18% ROTCE in the medium term. That would make returns comparable to the industry’s elites, such as JPMorgan Chase.
In a slide presentation, management said it plans to achieve these new return targets by capitalizing on revenue growth opportunities, continuing to focus on efficiency, simplifying its home lending business, and optimizing capital.
This brings me to Wells Fargo’s second big tailwind: Much lower regulatory capital requirements. Regulators require all large banks to maintain certain regulatory thresholds as a safety buffer in case of unexpected losses. One of these ratios is the common equity tier 1 (CET1) capital ratio, which examines a bank’s core capital in relation to its risk-weighted assets, such as loans.
In 2024, Wells Fargo’s CET1 requirement was 9.7%. This year, that requirement decreased to 8.5%. It may not sound like a lot, but when you are talking about banks with trillions in assets, this reduction can lead to billions or even tens of billions in excess capital.
