Wells Fargo is up more than 15% this year — and a big catalyst is still on the horizon

Published Wed, Mar 20 20241:55 PM EDT

Wells Fargo shares jumped over the past year as the once-embattled bank continued to clear the regulatory hurdles put in place after the phony accounts scandal of 2016. But one more milestone is still on the horizon, one that could move the stock even higher: lifting the Federal Reserve's $1.95 trillion asset cap . That asset cap was a first for the Fed, delivered in 2018 by then-Chair Janet Yellen as her last act leading the central bank and aimed at getting Wells to clean up its act. The punitive measure was also meant to send a message to other financial institutions. Other regulatory agencies also imposed punitive measures over the years, some of which have been cleared. One of the most high-profile consent orders was lifted by the Office of the Comptroller of the Currency last month. The move pushed Wells stock higher. Many experts say that this order was a key reason behind the Fed's asset cap in the first place — giving investors reason to think the lifting of the cap is not a matter of if but when. What would that mean for Wells? First, investor sentiment should improve. The Club has maintained that once Wells Fargo's asset cap is terminated the stock will have even more room to run. After climbing in the final months of 2023, shares of the bank continued higher in 2024. They have jumped nearly 17% year to date, outperforming their big bank peers as evidenced by the KBW Bank Index's gain of just 2.4% over the period. In a note to clients dated Tuesday, Citigroup cut the rating on Wells Fargo stock to neutral, arguing the "risk/reward is fairly balanced" after the stock's rally. Still, analysts at the firm also boosted their price target on Wells Fargo to $63 per share from $57 apiece, implying a 10.5% increase from Tuesday's closing price. WFC YTD mountain Wells Fargo (WFC) year-to-date performance Lifting the years-long order would likely soothe shareholders' concerns as well. "The sooner the bank can get the asset cap lifted, the greater confidence investors will have in management's ability to drive a sustained 15% return on tangible common equity," Jeff Marks, director of portfolio analysis for the CNBC Investing Club, said earlier this month. "The stronger a return Wells can generate, the higher the multiple investors will be willing to pay for the stock." Wall Street analysts agreed. "It's safe to say that it would be another leg up [for the stock]," Piper Sandler's senior banks analyst, Scott Siefers, told CNBC in an interview. To be sure, Wells Fargo hasn't disclosed when it expects this restriction will be lifted. But the latest consent order termination leads the Club to believe it's more likely to extend at least into 2025. When it does happen, the bank can take on more customer deposits. Think of these deposits as income-producing assets: The bank can use them to lend more and rake in additional revenue from fees and interest. "If we got rid of the asset cap, they would have the flexibility to take on money to their heart's content," Siefers said. "In other words, it just opens up a lot of possibilities." In a recent CNBC interview, Gerard Cassidy, head of U.S. bank equity strategy at RBC Capital Markets, said that the "silver lining in this entire period for Wells has been they have now built out a very strong core deposit base, as they're forced to push out less profitable deposits due to the limit on what they can put on their balance sheet." In turn, Cassidy said Wells can benefit from more wholesale deposits. These are generally much larger sums from institutions that the bank can make more money off of. This is because what Wells Fargo pays these clients to hold their funds is lower than what the bank would earn on lending it out. A lift of the cap would also allow the bank to expand. Wells Fargo CFO Michael Santomassimo said last month the bank's markets business has inevitably scaled back because of balance sheet restrictions. "When you look at the markets business, in particular, that definitely was a business that was impacted by the asset cap," the exec said at the UBS Financial Services Conference. "There'll be some opportunity, we think, to increase the activity there," he added. "Some of it could be financing type trades, some of it's inventory that you hold in certain businesses, but all within sort of the risk appetite that we've got." The firm's corporate and investment banking business, in particular, could gain from this increased activity. "Wells Fargo on a relative basis is very undersized in businesses such as investment banking," Siefers said, comparing the firm to rival JPMorgan. "One part of the investment banking business is being able to commit capital. ... In other words, put some risk on your balance sheet. But thanks to the asset cap, Wells has not been able to build out its investment bank to the same degree as some of its other peers." Siefers added: "So in my mind, that will be the most visible area where they'll have more of a free rein to grow and try to compete more effectively with their largest peers." Santomassimo said that once the asset cap is lifted, shareholders shouldn't expect big short-term changes. "I would just caution that when it does happen, it's not this light switch kind of moment where … all of a sudden, you start to see this growth," Santomassismo said. "But we do believe that there'll be some opportunity there. And I think we're positioning ourselves to be relevant for clients." (Jim Cramer's Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Wells Fargo shares jumped over the past year as the once-embattled bank continued to clear the regulatory hurdles put in place after the phony accounts scandal of 2016.

But one more milestone is still on the horizon, one that could move the stock even higher: lifting the Federal Reserve's $1.95 trillion asset cap.