To The Moon

$Wells Fargo(WFC)$

Over the past year, Wells Fargo's stock has surged by 62%, outperforming nearly all other stocks outside of high-growth names like Tesla, Palantir, and Nvidia. This remarkable performance comes from a major Money Center Bank trading at just 13 times forward earnings. So, what has Wells Fargo done to achieve such a turnaround, especially given its troubled past involving controversies, regulatory penalties, and an asset cap limiting its growth? Let’s break it down.

Key Factors Behind Wells Fargo’s Performance

1. New Management and Structural Changes: Wells Fargo's leadership overhaul has been pivotal. Historically plagued by scandals—like creating unauthorized accounts—poor management hindered the bank’s progress. However, new management brought fresh direction, accountability, and operational improvements, driving its recovery.

2. Cost Reduction and Efficiency Gains: The company has significantly cut costs, including a reported 47% reduction in its mortgage division headcount. These measures have bolstered cash flow and earnings per share (EPS). While such cost-cutting can't sustain profitability indefinitely, it has provided short-term gains.

3. Capital Optimization: Share buybacks have further boosted EPS, a common strategy among large corporations. Coupled with reduced operational costs, this has strengthened investor confidence.

4. Macroeconomic Tailwinds: The historic rise in interest rates by the Federal Reserve over the past 12–24 months has benefited banks like Wells Fargo, allowing them to rake in higher interest income. However, revenue growth is normalizing as consumer demand for loans, such as mortgages and auto loans, eases.

Challenges and Opportunities

• Asset Cap and Regulatory Oversight: Despite its progress, Wells Fargo remains under an asset cap imposed by regulators, limiting its growth potential. Once lifted, the bank could unlock further opportunities for expansion.

• Muted Revenue Growth: Revenue declined by 0.5% year-over-year in Q4, missing expectations by $200 million. Guidance for 2025 suggests modest growth, with optimism centered around a potential rebound in the latter half of the year.

• Wealth Management and Corporate Growth: Like JPMorgan, Wells Fargo has identified wealth management as a key growth area, signaling a shift toward high-value services. Increased M&A activity and bullish business sentiment, spurred by political changes and economic recovery, also present opportunities.

Lessons for Investors

Wells Fargo's resurgence underscores the transformative impact of leadership and strategic pivots. The bank’s ability to rebuild trust, streamline operations, and leverage its core strengths offers a roadmap for other companies facing similar challenges.

Looking Ahead

Investors should monitor Wells Fargo’s execution of its growth strategy, particularly in wealth management and its ability to sustain cost efficiencies. Additionally, the potential lifting of the asset cap could serve as a significant catalyst. For now, while the stock has seen remarkable gains, future performance will depend on maintaining momentum amid industry-wide pressures and economic uncertainties.

In summary, Wells Fargo is a prime example of how a solid foundation combined with strong leadership and disciplined execution can turn around even the most embattled companies.

I believe 2025 will mark the conclusion of significant restructuring efforts for Wells Fargo. Since 2019, the company has reduced its outstanding shares by 21%, primarily through share buybacks, which have played a substantial role in driving stock growth. However, these buybacks are somewhat constrained due to the regulatory restrictions stemming from the bank’s past scandals. Despite this, Wells Fargo recently increased its dividend by 15%, a positive signal for investors.

Some of the recent stock performance may reflect anticipation of these restrictions being fully lifted, which could pave the way for increased buybacks and more substantial dividend hikes in the future. Management deserves credit for navigating these challenges effectively and positioning the company for growth.

2025 Outlook and Performance Highlights:

• Net Interest Income: Expected to grow 1–3% in 2024, which represents the bank’s operating profit. This exceeded Wall Street's expectations, as analysts were forecasting just 1.7% revenue growth and negative EPS growth for the year. Wells Fargo’s more optimistic outlook has bolstered investor confidence.

• Non-Interest Expense: The company anticipates lower-than-expected expenses, potentially shaving off a few percentage points. This reflects management’s focus on efficiency and cost control.

• Streamlining Operations: Wells Fargo continues to restructure, particularly in areas under pressure, such as the mortgage division, which has faced significant challenges. These efforts have resulted in a leaner and more efficient organization.

Mixed Results in Key Areas:

• Retail Loan Originations: While ticking upward, growth remains modest, with loan activity only increasing fractionally.

• Refinancing Activity: This has seen some improvement but is expected to taper off heading into Q1 2025.

As we move into the latter half of next year, a potential drop in interest rates—if it extends to mortgage rates—could spark significant activity in refinancing. While rates haven’t dropped substantially yet, if they were to fall meaningfully below 6%, or even into the 5% range, it would create considerable demand. A return to mortgage rates in the 3-4% range would be a dream scenario, likely triggering a wave of refinancing. Over the past few quarters, refinancing activity has been steadily increasing, although this momentum is expected to taper off.

In terms of auto loan originations, there has been a slight uptick in activity, but this hasn’t translated into earnings growth. Consumer-side earnings in auto loans declined by 21% year-over-year due to tighter interest rate spreads. Additionally, Wells Fargo’s credit card business is a mixed bag. While the company has invested heavily in new products and promotions, these efforts are currently reducing profitability. Promotions like teaser rates (e.g., 0% interest for 12-16 months) are costly in the short term, but the strategy aims to retain customers and generate profits in the long run through cross-selling other products such as auto loans or checking accounts.

On the consumer side overall, earnings dropped by 7% year-over-year, from $6.5 billion to $6 billion. This decline can be attributed to a combination of factors, including:

• Provisions for Credit Losses: Increased 15% year-over-year, rising from $790 million to $911 million. This is concerning, especially when paired with a 4% drop in lending activity. While these levels are still relatively low compared to pre-pandemic numbers, a continued trend of higher credit loss provisions alongside declining loans would signal potential trouble.

• Deposits: Declined by 1% year-over-year, although this isn’t a major concern yet. Depositors are less aggressively seeking higher yields, which benefits banks like Wells Fargo by providing low-cost funding.

On the commercial banking side, the narrative is similar. Loan growth remained flat year-over-year, but deposits surged by 133%. This increase could lead to more mergers and acquisitions (M&A) activity in 2025, especially under a more business-friendly regulatory environment. While corporate investment banking saw a 6% decline in loan activity, deposit growth supports the possibility of further M&A opportunities.

In wealth management, Wells Fargo sees potential for growth. While many affluent customers currently use specialized firms like Goldman Sachs, Schwab, or BlackRock for wealth management, both Wells Fargo and JP Morgan have identified this as an area for expansion. Total assets in this division grew by 10%, driven by strong equity market performance and increased deposits from high-net-worth clients.

Key Takeaways:

• Technical Performance: After years of stagnation, Wells Fargo’s stock has surged, breaking past previous highs and creating a strong uptrend. Investors may want to wait for pullbacks to key levels, such as $63, before considering entry points.

• Management and Strategy: The company has been effectively navigating challenges with strong leadership, improving operational efficiency, and streamlining underperforming divisions like mortgages.

• Valuation and Outlook: Despite mixed results in Q4, Wells Fargo remains attractively valued, and its long-term fundamentals are solid.

For investors, Wells Fargo offers a compelling case study in recovery and outperformance. Identifying other stocks with similar setups—strong foundations, effective leadership, and room for improvement—could uncover opportunities for similar gains in the coming year.

Conclusion:

Wells Fargo provided strong guidance for 2025, despite mixed earnings results in some areas. The bank’s ability to exceed Wall Street’s expectations on key metrics, combined with ongoing streamlining efforts and operational improvements, highlights the effectiveness of its leadership team. With potential regulatory restrictions on buybacks and dividends easing, Wells Fargo could see further upside in the coming years.

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