Wells Fargo & Company WFC shares touched a 52-week high of $74.41 on Friday. The stock closed the session a little lower at $74.34, gaining 31.7% in the past three months.
The stock has outperformed the industry and its peers like Bank of America Corporation BAC and Citigroup Inc. C in the same time frame.
Three-Months Price Performance Chart
Image Source: Zacks Investment Research
A major factor for this upward movement of WFC stock can be attributed to the Federal Reserve’s recent interest rate cut, which is expected to drive near-term expansion in net interest income (NII) and net interest margin (NIM), supporting top-line growth. Also, the company’s expense management activities are expected to support the bottom-line growth.
Now let’s find out if WFC stock has more upsides left despite hitting a 52-week high.
Factors Driving WFC Stock
Fed’s Rate Cut to Aid NII: The Federal Reserve has begun reducing interest rates, with a 50-basis-point (bps) cut in September and an additional 25 bps cut on Nov. 7, 2024. These reductions, along with potential future rate cuts in the upcoming months, are expected to support NII as funding costs gradually stabilize and eventually decline.
Wells Fargo’s NII witnessed a CAGR of 9.4% over the last three years (ended 2023). However, the metric declined in the first nine months of 2024 due to high funding costs.
Similarly, the net interest margin (NIM) expanded to 3.06% in 2023 compared with 2.63% in 2022 and 2.05% in 2021 but contracted during the first nine months of 2024.
The Fed’s recent rate cuts will lead to the stabilization of funding costs over time, which will lead to improvement in WFC’s NII and NIM in the near term.
Expense Management Initiatives to Aid Bottom Line: Wells Fargo’s prudent expense management initiatives support its financials. Since third-quarter 2020, the company has been actively engaging in cost-cutting measures, including the streamlining of its organizational structure, closure of branches and reduction in headcount.
Non-interest expenses witnessed a negative CAGR of 1.1% over the last four years (ended 2023). However, expenses saw an upward trend in the first nine months of 2024 due to higher revenue-related compensation, predominantly in the Wealth and Investment Management division, as well as higher technology and equipment expenses. These were partially offset by the positive impacts of efficiency initiatives. The bank delivered gross expense savings aggregating $10 billion between 2021 and 2023. It expects to continue with these efficiency initiatives in 2024.
Management projects non-interest expenses to be $54 billion this year, indicating a decline from the $55.6 billion in 2023.
Strong Deposit Base to Support Financials: Wells Fargo continues to build on its deposit base, evidenced by its three-year (ended 2023) compound annual growth rate (CAGR) of 1.1%.
Total deposits declined marginally in the first nine months of 2024 due to customers allocating cash to higher-yielding alternatives. However, the pace of allocating cash to higher-yielding alternatives is slowing. This, along with a large base of retail clients, will likely support the deposit balance in the upcoming period.
Strong Balance Sheet Position: The bank enjoys a decent solid balance sheet position. As of Sept. 30, 2024, Wells Fargo’s long-term debt was $182.1 billion. However, short-term borrowings were $111.9 billion. The company has a strong liquidity position, with a liquidity coverage ratio of 127% as of the third quarter of 2024, which has exceeded its regulatory minimum of 100%. Its liquid assets (including cash and due from banks, as well as interest-earning deposits with banks) totaled $185.5 billion as of the same date.
The bank also maintains long-term issuer investment-grade credit ratings of A+, A1 and BBB+ from Fitch, Moody’s and S&P Global, respectively. Thus, given the solid credit profile and liquidity position, Wells Fargo will be able to meet its near-term debt obligations, even if the economic situation worsens.
Strong Capital Position & Impressive Capital Distributions: The company’s focus on maintaining a strong capital position will support its capital distribution activities. As of Sept. 30, 2024, the company’s capital ratios were well above the regulatory requirements, with a Tier 1 common equity ratio of 11.3% under the Standardized Approach, a Tier 1 capital ratio of 12.8% and a Total capital ratio of 15.5%.
WF has a dividend-paying history. In July 2024, the company announced a dividend hike of 14% to 40 cents per share from its prior payout. WFC has increased its dividend five times in the past five years, with a five-year annualized dividend growth of 10.84%. Currently, WFC has a 30% dividend payout ratio.
Similar to WFC, BAC increased its dividend four times over the past five years, while C raised its dividend twice over the same time frame. Currently, BAC pays a quarterly dividend of 26 cents per share with a payout ratio of 33%, while BAC pays 56 cents per share with a payout ratio of 41%.
Wells Fargo & Company Dividend Yield (TTM)
Wells Fargo & Company dividend-yield-ttm | Wells Fargo & Company Quote
The company also has a share repurchase program in place. In July 2023, its board of directors authorized a new share repurchase program worth $30 billion. In the first nine months of 2024, Wells Fargo repurchased more than $15 billion worth of shares. As of Sept. 30, 2024, $11.3 billion worth of shares remained under the authorization.
Given its robust capital position and ample liquidity, the company’s capital-deployment activities seem sustainable and will boost investor confidence in the stock.
Concerns Prevailing for Wells Fargo
Ongoing Asset Cap Limits Growth Potential: WFC’s loan balance is not likely to improve much, as Wells Fargo still has an asset cap in place, which will remain until it complies fully with regulators’ demands regarding compliance and operational risk management.
In September 2024, WFC submitted a third-party review of its risk and control overhauls to the Fed for scrutiny and approval, per a Bloomberg report. The submission follows a lengthy process of plan presentation, multiple approvals, implementation and external audit. Management anticipates the cap to remain until at least 2025, likely keeping near-term loan growth subdued.
Declining Mortgage Banking Income: Wells Fargo’s mortgage banking activities consist of residential and commercial mortgage originations, sales and servicing. Mortgage banking income saw a four-year (ended 2023) negative CAGR of 25.7%. Although the metric witnessed an uptick in the first nine months of 2024, driven by a modest rise in refinancing activities, the same is expected to remain muted in the near term due to low origination as mortgage rates are still relatively high.
In 2023, the company announced its exit from the Correspondent business and reduction of its mortgage servicing portfolio. Additionally, in August 2024, the bank announced an agreement to divest its non-Agency third-party servicing segment of its CMS business to Trimont. This, along with relatively high mortgage rates and low originations, is likely to affect mortgage banking income in the upcoming quarters.
Final Words on WFC Stock
Wells Fargo benefits from deposit growth, a strong capital position and a solid liquidity profile. Additionally, the Federal Reserve's rate cuts are anticipated to stabilize funding costs, which will lead to improvement in the company’s financials in the upcoming period. Further, cost-efficiency initiatives might support bottom-line growth in the upcoming period.
Analyst Estimates for Wells Fargo
Analysts seem to be optimistic about the company’s growth prospects. In the past seven days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Image Source: Zacks Investment Research
Though WFC’s earnings are expected to decline 2.95% in 2024, it is expected to rebound and increase 3.52% in 2025.
However, its lower loan balance due to asset cap and declining mortgage banking income remains near term concerns.
Thus, investors should not rush to buy Wells Fargo stock at the current level. Rather, they should wait for a better entry point. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
