Wells Fargo just got a green light from the Fed to grow. Here's what it means for its business and its stock.

The Federal Reserve has lifted the asset cap on Wells Fargo, removing a key restriction imposed after the bank's fake-accounts scandal and paving the way for future growth. Wells Fargo's stock rose over 2% in extended trading following the announcement, though it has underperformed its peers since the consent order was issued in 2018. Analysts anticipate the bank will now focus on improving its return on tangible common equity to 15% and expanding its retail banking, credit card offerings, wealth management, and investment banking businesses.

Analysis

The U.S. Federal Reserve's decision to lift Wells Fargo's (WFC) asset cap marks a significant turning point for the bank, removing a critical growth impediment imposed in 2018 following its fake-accounts scandal. This development, termed a 'milestone' by the company and 'liberation day' by Truist analysts, prompted an immediate positive reaction in WFC's stock, which rose over 2% in extended trading after a 1.3% gain in the regular session. The removal of this restriction, one of the last and most significant stemming from the scandal for which Wells Fargo paid billions in penalties including $3 billion to the Justice Department and securities regulators, is expected to enable the bank to pivot towards a growth-oriented strategy. Analysts anticipate Wells Fargo will now focus on achieving a 15% return on tangible common equity over the medium term and will pursue expansion across its retail banking, credit card offerings, wealth-management franchise, and investment banking. Chief Executive Charlie Scharf characterized the cap removal as a 'pivotal milestone,' indicating plans for 'controlled and linear' growth, particularly in corporate deposits and corporate and investment banking, areas previously constrained. This regulatory green light follows a recent clearance from the Office of the Comptroller of the Currency that paved the way for deeper forays into retail banking. Despite these positive developments and a nearly 8% year-to-date stock gain outpacing the S&P 500's approximate 1.5% rise, Wells Fargo's shares have notably underperformed peers since April 20, 2018, gaining 43.9% through Monday, compared to J.P. Morgan Chase's 138.9%, Bank of America's 47.6%, the Financial Select Sector SPDR ETF's 83.2%, and the S&P 500 index's 123.6% surge over the same period.

Key Decisions for Investors

• Investors should re-evaluate Wells Fargo's valuation and growth trajectory against its peers, as the removal of the asset cap could present an opportunity for the bank to address its historical underperformance.
• Closely monitor management's execution on its strategic pivot, particularly progress in expanding revenue in previously constrained areas like corporate and investment banking, and its ability to achieve the targeted 15% return on tangible common equity in the medium term.
• While this regulatory de-risking is a significant positive catalyst, consider the extent to which the recent year-to-date stock appreciation of nearly 8% already incorporates this news and assess the timeline for realizing projected financial improvements and market re-rating.