Wells Fargo Offers Near-Term Rate Leverage And Long-Term Turnaround Potential

 

I’ve been bullish on Wells Fargo (NYSE:WFC) for a while – less on the basis of thinking it’s great and more on the basis of thinking “it’s not that bad” – and over the last six months this call has finally started to work. A shift toward “risk on” banks leveraged to the post-pandemic recovery has certainly helped, particularly with Wells Fargo’s well-above-average asset sensitivity, as has some increased confidence on management’s restructuring/turnaround plan and progress toward resolving the asset cap that has constrained the business for some time.

As one of the three banks in the U.S. with double-digit deposit share, Wells Fargo has a real chance of becoming one of the long-term winners as smaller “run of the mill” regional and community banks are squeezed out over time. Moreover, a streamlined bank more focused on higher-return opportunities in consumer and commercial banking has a better chance of recovering to mid-teens returns on tangible common equity over the next three to five years.

Given where things stand today, the investment argument for Wells Fargo is more complicated. I think investors who want an underappreciated story could do better with Citigroup (NYSE:C) or Truist (NYSE:TFC) among the larger banks now, and I think JPMorgan (NYSE:JPM) remains an appealing longer-term hold as well (with Bank of America (NYSE:BAC) moderately less attractive). Still, I do see annualized total return potential still in the high single-digits, which is still above the long-term norms of the sector, and there is still upside potential from the turnaround/restructuring efforts.

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Wells Fargo Offers Near-Term Rate Leverage And Long-Term Turnaround Potential