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Here's Why You Should Add Wells Fargo Stock to Your Portfolio Now
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Adding Wells Fargo & Company (WFC - Free Report) stock to your portfolio seems to be a wise idea now, given the strength in the company’s fundamentals and solid prospects. Moreover, a strong balance sheet position keeps it well poised for growth.
The Zacks Consensus Estimate for Wells Fargo’s 2024 and 2025 earnings have been revised upward over the past 30 days, indicating that analysts are optimistic regarding its earnings growth potential.
Estimate Revision Trend
Image Source: Zacks Investment Research
Over the past six months, WFC has gained 21.3% compared with the industry’s growth of 19.3%. The stock has also fared better than its peers, Citigroup Inc. (C - Free Report) and Bank of America Corporation (BAC - Free Report) .
Now, let’s discuss some of the factors that make WFC stock worth a look.
Progresses to Fix Compliance Problems: Since 2018, Wells Fargo has been operating under a $1.95 trillion asset cap imposed by regulators due to the fake account scandal. According to a Reuters report from November 2024, this cap could be lifted in the first half of 2025, provided that it resolves its risk management and compliance issues. However, the final decision will depend on a vote from the Federal Reserve's board of governors.
At the Goldman Sachs 2024 U.S. Financial Services Conference held on Dec. 11, 2024, Wells Fargo’s CEO Charlie Scharf expressed confidence in the bank's progress to fix compliance problems following its years-long scandal, detailing its efforts to implement risk controls. Scharf emphasized that detailed plans are in place for each consent order and regulatory requirement, all of which have been thoroughly reviewed by regulators.
Given that loans are among the largest assets a bank can hold, lifting the asset cap will 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.
Fed’s Rate Cut to Support NII: The Federal Reserve lowered the interest rates by 100 basis points since September 2024. The fed fund rates are now in the 4.25-4.5% range. Also, the central bank hinted at two more rate cuts this year.
The rate cut is a positive development for Wells Fargo, which is under increasing funding cost pressures. During the nine months of 2024, net interest income (NII) declined 10% from the same period a year ago. Net interest Margin (NIM) declined to 2.67% in the third quarter of 2024 from 2.75% in the second quarter of 2024 and 2.81% in the first quarter of 2024. For 2024, management expects NII to decline 9% on a year-over-year basis.
With a decline in interest rates, funding costs will stabilize and decline eventually. This will support WFC’s NII and NIM expansion in the upcoming period.
Revenue Growth: WFC has shown remarkable revenue growth by achieving a compound annual growth rate (CAGR) of 3.6% over the past three years (2020-2023). Although the metric declined in the first nine months of 2024, the Fed's rate cuts are likely to boost net NII growth in the near term. As funding costs stabilize and market conditions adjust, WFC is likely to see a rebound in NII, which will drive overall revenue growth. Additionally, decent fee income growth, supported by strong performance in the Wealth and Investment Management division, will further contribute to revenue growth.
Revenue Growth Trend
Image Source: Zacks Investment Research
Efforts to Achieve Cost Efficiency: 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). Although expenses rose 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. Such efforts will continue to support the company’s bottom-line growth in the near term.
Earnings Strength: Wells Fargo’s earnings have witnessed a rise of 31.09% over the past three to five years, higher than the industry's growth of 6.70%. While the company’s earnings are projected to decline 2.76% in 2024, it will likely rebound and grow 4.02% in 2025. Its earnings surpassed estimates in each of the trailing four quarters.
Strong Balance Sheet Position: As of Sept. 30, 2024, WFC had a strong liquidity position, with a liquidity coverage ratio of 127%, which 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. Wells Fargo’s long-term debt was $182.1 billion. However, short-term borrowings were $111.9 billion as of Sept. 30, 2024.
Thus, given the solid liquidity position, Wells Fargo will be able to meet its near-term debt obligations, even if the economic situation worsens.
Strong Capital Position Aids Capital Distribution: As of Sept. 30, 2024, Wells Fargo’s Common Equity Tier 1 ratio and the total capital ratio of 11.01% and 15.02%, respectively, were well above the regulatory requirements.
In July 2024, the company announced a dividend hike of 14% to 40 cents per share from its prior payout. The company raised its dividend five times in the past five years and has a payout ratio of 30%. Similarly, BAC has increased its dividends four times in the past five years, while Citigroup hiked it twice. BAC and C have a payout ratio of 33% and 41%, respectively.
Moreover, Wells Fargo also has a share repurchase program in place. In July 2023, its board of directors authorized a share repurchase program worth $30 billion. As of Sept. 30, 2024, the company had a remaining authority to repurchase up to $11.3 billion of common stock.
Given its robust capital position and ample liquidity, WFC’s capital-deployment activities seem sustainable.
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Here's Why You Should Add Wells Fargo Stock to Your Portfolio Now
Adding Wells Fargo & Company (WFC - Free Report) stock to your portfolio seems to be a wise idea now, given the strength in the company’s fundamentals and solid prospects. Moreover, a strong balance sheet position keeps it well poised for growth.
The Zacks Consensus Estimate for Wells Fargo’s 2024 and 2025 earnings have been revised upward over the past 30 days, indicating that analysts are optimistic regarding its earnings growth potential.
Estimate Revision Trend
Image Source: Zacks Investment Research
Over the past six months, WFC has gained 21.3% compared with the industry’s growth of 19.3%. The stock has also fared better than its peers, Citigroup Inc. (C - Free Report) and Bank of America Corporation (BAC - Free Report) .
Price Performance
Image Source: Zacks Investment Research
WFC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Now, let’s discuss some of the factors that make WFC stock worth a look.
Progresses to Fix Compliance Problems: Since 2018, Wells Fargo has been operating under a $1.95 trillion asset cap imposed by regulators due to the fake account scandal. According to a Reuters report from November 2024, this cap could be lifted in the first half of 2025, provided that it resolves its risk management and compliance issues. However, the final decision will depend on a vote from the Federal Reserve's board of governors.
At the Goldman Sachs 2024 U.S. Financial Services Conference held on Dec. 11, 2024, Wells Fargo’s CEO Charlie Scharf expressed confidence in the bank's progress to fix compliance problems following its years-long scandal, detailing its efforts to implement risk controls. Scharf emphasized that detailed plans are in place for each consent order and regulatory requirement, all of which have been thoroughly reviewed by regulators.
Given that loans are among the largest assets a bank can hold, lifting the asset cap will 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.
Fed’s Rate Cut to Support NII: The Federal Reserve lowered the interest rates by 100 basis points since September 2024. The fed fund rates are now in the 4.25-4.5% range. Also, the central bank hinted at two more rate cuts this year.
The rate cut is a positive development for Wells Fargo, which is under increasing funding cost pressures. During the nine months of 2024, net interest income (NII) declined 10% from the same period a year ago. Net interest Margin (NIM) declined to 2.67% in the third quarter of 2024 from 2.75% in the second quarter of 2024 and 2.81% in the first quarter of 2024. For 2024, management expects NII to decline 9% on a year-over-year basis.
With a decline in interest rates, funding costs will stabilize and decline eventually. This will support WFC’s NII and NIM expansion in the upcoming period.
Revenue Growth: WFC has shown remarkable revenue growth by achieving a compound annual growth rate (CAGR) of 3.6% over the past three years (2020-2023). Although the metric declined in the first nine months of 2024, the Fed's rate cuts are likely to boost net NII growth in the near term. As funding costs stabilize and market conditions adjust, WFC is likely to see a rebound in NII, which will drive overall revenue growth. Additionally, decent fee income growth, supported by strong performance in the Wealth and Investment Management division, will further contribute to revenue growth.
Revenue Growth Trend
Image Source: Zacks Investment Research
Efforts to Achieve Cost Efficiency: 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). Although expenses rose 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. Such efforts will continue to support the company’s bottom-line growth in the near term.
Earnings Strength: Wells Fargo’s earnings have witnessed a rise of 31.09% over the past three to five years, higher than the industry's growth of 6.70%. While the company’s earnings are projected to decline 2.76% in 2024, it will likely rebound and grow 4.02% in 2025. Its earnings surpassed estimates in each of the trailing four quarters.
Strong Balance Sheet Position: As of Sept. 30, 2024, WFC had a strong liquidity position, with a liquidity coverage ratio of 127%, which 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. Wells Fargo’s long-term debt was $182.1 billion. However, short-term borrowings were $111.9 billion as of Sept. 30, 2024.
Thus, given the solid liquidity position, Wells Fargo will be able to meet its near-term debt obligations, even if the economic situation worsens.
Strong Capital Position Aids Capital Distribution: As of Sept. 30, 2024, Wells Fargo’s Common Equity Tier 1 ratio and the total capital ratio of 11.01% and 15.02%, respectively, were well above the regulatory requirements.
In July 2024, the company announced a dividend hike of 14% to 40 cents per share from its prior payout. The company raised its dividend five times in the past five years and has a payout ratio of 30%. Similarly, BAC has increased its dividends four times in the past five years, while Citigroup hiked it twice. BAC and C have a payout ratio of 33% and 41%, respectively.
Moreover, Wells Fargo also has a share repurchase program in place. In July 2023, its board of directors authorized a share repurchase program worth $30 billion. As of Sept. 30, 2024, the company had a remaining authority to repurchase up to $11.3 billion of common stock.
Given its robust capital position and ample liquidity, WFC’s capital-deployment activities seem sustainable.