It is liberation day for Wells Fargo, but it has nothing to do with tariffs.
Wells Fargo & Company (NYSE:) stock spiked 4% in early trading after it got its own version of liberation day.
The nation’s third largest bank with $1.7 trillion in assets under management was informed by the Federal Reserve that its asset growth restriction had been lifted.
The restriction was placed on the bank in 2018 in response to what the Fed called “widespread consumer abuses and other compliance breakdowns.”
Wells Fargo’s issues have been well documented over the years, resulting in billions of dollars in fines for various violations, including a scandal where sales staff created fake accounts to artificially inflate sales numbers.
The asset growth restriction prevented the bank from growing any larger than its total asset size as of the end of 2017 until it improved its governance and controls. At the end of 2017, the bank had $1.95 trillion in AUM.
The result had been years of underperformance, until the last few years, as efforts by new CEO Charlie Scharf began to pay off.
But late on Tuesday, the Fed issued a statement saying that Wells Fargo had met all the conditions set in 2018, so it was removing the growth restriction.
“Removal of the asset cap represents successful remediation to the required standard based on focused management leadership, strong board oversight, and strict supervision holding the firm accountable,” Fed Governor Michael Barr said. “All three will need to continue for the firm to have a sustainable approach.”
Pivotal Moment for Wells Fargo
Wells Fargo has been undergoing a transformation since Scharf took over in 2019 to clean up the mess. His work has slowly begun to pay off, as Wells Fargo stock has posted an average annualized return of 20% over the past three years. Over that time, it has far outperformed all other large banks, except for JPMorgan Chase (NYSE:), which has a 26% annualized return.
The same is true over the past year, as Wells Fargo stock is up 28%, trailing only JPMorgan Chase, up 31%. Year-to-date, the stock is up about 9%.
“The Federal Reserve’s decision to lift the asset cap marks a pivotal milestone in our journey to transform Wells Fargo. We are a different and far stronger company today because of the work we’ve done,” Scharf said. “In addition, we have changed and simplified our business mix, and we have transformed the management team and how we run the company. We have been methodically investing in the company’s future while improving our financial results and profile. We are excited to continue to move forward with plans to further increase returns and growth in a deliberate manner supported by the processes and cultural changes we have made.”
Scharf thanked all 215,000 employees and gave them each a $2,000 award for their contributions.
Analysts Raise their Price Targets
Wells Fargo stock settled back down after the initial spike, as the gains had pretty much been priced in already. This did not come as a shock, as Wells Fargo had been in turnaround mode, so it was just a matter of when the restrictions would be lifted.
Wells Fargo officials did not indicate which growth opportunities this will unlock, but analysts were bullish. Evercore raised its price target by $16 per share to $88 per share, while analysts at Truist boosted its target to $83 per share, calling it “liberation day” for the bank.
Truist analysts said they expect the company to balance efficiency with long-term investments and improve its return on tangible common equity, reported MarketWatch. “We also expect the ongoing pivot to offense across the company to continue, especially within the retail bank, as well as with its credit-card offering, wealth-management franchise and investment banking.”
Wells Fargo has a median price target of $80 per share, which would suggest 5% growth. The Evercore target of $88 per share would mean a 15% return.
The stock is fairly cheap with a P/E of 13, so it looks like a decent option, certainly among banks, right now. With restrictions lifted and rates potentially dropping, it could be a good environment for the bank to grow, barring a recession.
Original Post
