Time to add the stock to your portfolio?

On December 25, 2024By Littum

Shares of Wells Fargo & Company WFC is up 46.3% year-to-date compared to the industry’s rise of 44.4%. The stock has also outperformed its peers, JPMorgan JPM and Morgan Stanley MS, over the same time frame.

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The stock is trading above its 50-day moving average, indicating bullish sentiment among investors.

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Let’s find out the reasons behind WFC’s solid performance this year and how to play the stock in 2025.

At the Goldman Sachs 2024 US Financial Services Conference held Dec. 11, Wells Fargo CEO Charlie Scharf expressed confidence in the bank’s progress in addressing compliance issues following its year-long fake account scandal and detailed its efforts to implement risk controls . “For every single one of our consent orders that we have, for every single one of our regulatory deliverables, we have extremely detailed plans in place that the regulators have reviewed,” Scharf said.

Last month, Reuters reported that WFC is in the final stages of meeting its regulatory requirements to remove the $1.95 trillion asset cap. This asset cap was imposed in 2018 following the revelation of its fake account scandal. According to the report, the asset cap could be removed in the first half of 2025, provided the bank resolves its risk management and compliance issues. However, the decision to lift the restriction would require a vote of the Federal Reserve Board.

In February 2024, the 2016 consent order issued by the Office of the Controller of Currency regarding unsafe sales practices was rescinded. This development was an important step towards the potential lifting of the asset cap.

Given that loans are among the largest assets a bank can hold, lifting the asset cap would mark a turning point for Wells Fargo. This will allow the bank to offer loans without restrictions, supporting its top line expansion and long-term growth.

Wells Fargo’s prudent expense management initiatives have supported its finances. Since the third quarter of 2020, the company has been actively engaged in cost-saving measures, including streamlining of the organizational structure, branch closures and reductions in the number of employees. In the third quarter of 2024, the company’s headcount fell almost 25% from the third quarter of 2020.

Wells Fargo also continues to invest in and optimize its branch network. It is more aware of branch placement strategy as the number of branches fell to 4,196 per September 30, 2024 from 5,229 at the end of the third quarter of 2020.

Driven by these initiatives, WFC’s non-interest expenses decreased by 13.8% at the end of the third quarter of 2024 from the third quarter of 2020.

The Federal Reserve’s aggressive start to monetary policy easing is likely to support WFC’s net interest income (NII) over time. The Fed has cut interest rates twice since September. At present, the fat fund interest rates are around 4.5-4.75%. Fed funds futures now indicate a 97.1% chance of a 25-basis-point rate cut at the FOMC meeting later this week, according to CMEGroup’s FedWatch Tool.

The interest rate cut is a positive development for WFC, which is under increasing funding cost pressure. While high interest rates have led to a significant jump in NII, they have raised funding and deposit costs, thereby squeezing the company’s net interest margin (NIM).

Wells Fargo’s NII and NIM have been dampened by increased funding costs as the high interest rate environment weighed on it. Management expects that NII in 2024 will fall by 9% compared to the previous year. However, as the central bank is expected to keep cutting interest rates, it will support NIM expansion going forward.

Wells Fargo rewards its shareholders handsomely. In July 2024, the company announced a dividend increase of 14% to 40 cents per share. share from its previous payout. It has increased its dividend five times over the past five years.

WFC has an annual dividend growth rate of 10.8% with a payout ratio of 30%.

Wells Fargo also has a stock buyback program in place. In July 2023, the company’s board approved a share buyback program worth $30 billion. In the first nine months of 2024, Wells Fargo bought back more than $15 billion worth of stock. Per As of September 30, 2024, the Company was authorized to repurchase up to $11.3 billion of common stock.

WFC has a strong liquidity position with a liquidity coverage ratio of 127% per 30 September 2024, which has exceeded its regulatory minimum of 100%. Its liquid assets (including cash and receivables from banks, as well as interest-earning deposits with banks) amounted to $185.5 billion on the same date.

Given its robust capital position and ample liquidity, the company’s capital utilization activities appear sustainable.

Over the past 60 days, the Zacks Consensus Estimate for WFC’s 2024 and 2025 earnings has moved upward. The estimate for 2024 indicates a year-on-year decline of 2.9%, while the metric is expected to rise 3.9% in 2025.

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Find the latest EPS estimates and surprises on the Zacks Earnings Calendar.

From a valuation standpoint, Wells Fargo seems somewhat cheap relative to the industry. The company currently trades at a discount to a forward 12-month P/E multiple of 12.89X, below the industry average of 14.16X.

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The stock is also significantly cheaper than its peers, MS and JPM’s current trailing 12-month P/E of 16.20X and 14.28X, respectively.

Wells Fargo’s progress in resolving compliance issues will help lift the asset cap. This will allow the company to offer loans without restrictions, supporting top line expansion. Its progress on efficiency initiatives, such as branch and footprint reduction, will support cost reduction and drive bottom line growth.

With a decent liquidity profile, the capital allocation move seems sustainable. Fed rate cuts will support growth in NII and NIM over the long term. Its cheap valuation and positive estimate revisions make the stock worth considering.

Therefore, investors should consider investing their cash in WFC at its current price levels for solid long-term returns.

Wells Fargo currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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