This Bank Stock Is One of 2021's Best Performers So Far

Wells Fargo (WFC -1.19%) has been one of the financial sector's worst performers for several years. Not only did the bank's "fake accounts" scandal and Federal Reserve penalty hurt performance, but the consumer-focused bank was hit harder than most by the COVID-19 pandemic. Not only that, but it appears one of the bank's longtime fans and shareholders, Warren Buffett, has given up on Wells Fargo as an investment.

However, 2021 is shaping up to be a different story, with Wells Fargo handily outperforming its big-bank peers. In this Fool Live clip, recorded on Feb. 22, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why Wells Fargo has been performing so well this year. 

Jason Moser: Listen, I feel like I'd be doing you a disservice if I didn't at least mention the fact that your financial stock for 2021, the stock that you highlighted on this very show at the beginning of the year, and loyal listeners will recall that stock is Wells Fargo. Well I think Wells Fargo's giving you the old Larry David, Matt, making you feel pretty, pretty, pretty good with shares up 25% year to date. Congratulations on that. Recently we got an update on Wells Fargo in regard to regulators, and I'm going to let you take it from here. What exactly is going on with Wells Fargo, and why should investors be encouraged?

Matt Frankel: Yes, so they're up 25% year to date. That's compared to 11% for the overall financial sector. Bank of America (BAC -2.00%), J.P. Morgan (JPM -0.69%), and Citigroup (C -1.11%) are all below that level. They have been outperforming and for some good reasons, I'll get to that update in one second. For one, they have the most to gain from reopening because they're mostly a consumer bank. Unlike Bank of America, JPMorgan Chase, Citigroup, all have big investment banking divisions that have actually held up well during the pandemic.

As things start to normalize, things like trading revenue and stuff like that could really start to taper off. Wells Fargo doesn't care about that. They're a consumer bank, so they care about the health of the consumer, which is why they stand to benefit really a lot from reopening. They also stand to benefit the most from interest rates normalizing. Since the beginning of the year, you mentioned Wells Fargo's up by 25%, the 10-year Treasury yield is up by 44% year to date. It's gone from below 1% to 1.34% as I write this. The 10-year is usually a really good benchmark of just overall interest rate activity.

Wells Fargo makes its money primarily from consumer banking, which means loaning money out and collecting interest. The higher interest goes, the more that the bank benefits, and number three, as you mentioned, we got an update that the Federal Reserve has approved Wells Fargo's plan to make things right in terms of its governance, after years of misbehavior and getting it wrong. The Fed has finally approved its plan. If you're not familiar, Wells Fargo got slapped with a Federal Reserve penalty in early 2018. Never happened before to a bank. Essentially it said, Wells Fargo can not grow beyond the size that it was at the end of 2017. So Wells Fargo missed out on 2018, 2019, and 2020, which 2018 and 2019 were two of the best years for growth in the banking business.

The economy was firing on all cylinders, the tax cuts were just passed. Wells Fargo missed out on all that. Now it looks like they're taking the first steps to get that asset cap lifted. If Wells Fargo is allowed to grow again, that's a game changer in the investing thesis. It's not there yet, but this is definitely an important first step that regulators have signed on and said, OK, your governance plan, you're doing it right this time. They brought in an outside CEO, they overhauled the board, they overhauled the sales practices, things like that.

So the Federal Reserve is finally saying, OK, you're on the right track. That's definitely a positive. I think Wells Fargo still has a ways to go from here.