The US bank is reaping the benefits of higher interest rates and is well positioned for tougher capital requirements
When regulators hit Wells Fargo with an unprecedented asset cap in 2018, executives told analysts and investors that it would be lifted in a year or so.
Five years on, the cap — which prevents the US’s fourth-largest bank from growing its balance sheet beyond its end-of-2017 level of $1.95tn — remains in place. The asset base limit has been costly for the bank, casting a long shadow over its stock performance.
There are reasons to think the cap may lift not too long from now. Investors, some of whom sat in on a public presentation management gave on Tuesday, should position themselves accordingly.
Under chief executive Charlie Scharf, Wells Fargo has made progress on fixing the internal problems that gave rise to a series of scandals. It has slimmed down its home lending business and sold its asset management division. It has also paid billions of dollars in penalties and settlements.
In the process, Wells Fargo has focused on boosting its core retail lending business. It is reaping the benefits of the higher interest rate environment. It reported a net interest margin of 3.09 per cent in the second quarter, up from 2.39 per cent a year earlier. It also raised its outlook for net interest income.
The metric is now expected to grow 14 per cent this year compared with previous guidance of a 10 per cent increase. Meanwhile, tighter cost control has helped cut the efficiency ratio, a measure of expenses to revenue, to 63 per cent compared with 75 per cent a year ago.
Return on average tangible common equity came in at a robust 13.7 per cent.
The bank also looks well positioned for tougher capital requirements under new Basel III standards. The common equity tier one ratio of 10.7 per cent is well above the regulatory minimum of 8.9 per cent.
Some of these improvements are reflected in Wells Fargo’s valuation. The stock is trading at near book value even as rival main street lenders like Citigroup, Bank of America and Truist Financial are trading below.
Yet shares in Wells Fargo remain some 37 per cent off from their pre-asset cap highs in 2018, while those for JPMorgan Chase are up about a quarter. This leaves room for further upside for when Wells Fargo is finally released from its asset cap handcuffs.
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Source: Financial Times
