Please ensure Javascript is enabled for purposes of website accessibility

1 Reason Wells Fargo Can Keep Winning

By Dave Kovaleski - Mar 13, 2021 at 10:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The bank's forward momentum hinges on one factor -- and it's looking good.

When many investors think of Wells Fargo (WFC 0.15%), they think of that scandal-plagued bank that has underperformed its large peers over the past five years. But things have gradually changed at the bank, the third-largest in the U.S. according to the Federal Reserve. In fact, this year, Wells Fargo has outperformed its peers -- up about 32% year to date at Friday's prices.

Yes, Wells Fargo is winning. Investors want to know why, and whether it's sustainable. The answers are yes and yes, for one key reason: improved risk management and oversight.

Smiling woman with arms crossed, standing in corporate meeting room

Image source: Getty Images.

Risky business

Much has been written about the problems at Wells Fargo, which have lingered over the bank for almost eight years and cost it billions in fines. The scandal also led to a revolving door of executive leadership and a plummeting stock price.

But things started to change in October 2019 when Wells Fargo hired Charles Scharf as its new CEO. Scharf came to Wells Fargo from Bank of New York Mellon, but he was also CEO at Visa and president of retail financial services at JPMorgan Chase, learning under his now-rival, Jamie Dimon.

One of Scharf's first major initiatives was to reorganize the business lines to improve accountability and responsibility. Now there are chief risk officers for all five business lines: consumer and small business, commercial banking, corporate and investment banking (CIB), wealth and investment management, and consumer lending. All five CROs report to one overarching CRO. Previously, this was not the case.

Wells Fargo also has other risk management teams organized by risk type, as well as a chief compliance officer and a head of operational risk management.

The one thing

There has been a major development on the risk management front that investors should know about. In February, Bloomberg initially reported that the Federal Reserve will approve of Wells Fargo's plan to overhaul its risk management and governance operations.

The Federal Reserve had imposed a cap on Wells Fargo's assets in 2018 due to the oversight failures, saying they could not exceed the total amount of assets reported at the end of 2017 until several conditions were met. One of them was a satisfactory risk management plan.

It was a major hurdle, and although there are a few others to clear, Wells Fargo is on its way to having that cap requirement terminated, possibly by the end of the year, according to Bloomberg. Along with all the other issues that Wells Fargo had been facing, including the pandemic and its internal issues, the cap is one of the reasons Wells Fargo has underperformed its peers.

Scharf has Wells Fargo on the right path back, as it has made efforts to further diversify its revenue stream by investing in its investment banking business, as it lags behind the other big banks. Wells Fargo's efficiency ratio is very high at 83%, which means its expenses are higher in relation to its revenue. But Scharf plans to cut expenses by $10 billion. 

Furthermore, the company announced in February that it is selling off its asset management business to private equity firms GTCR and Reverence Capital Partners for $2.1 billion. It was not a core business, so this was a strategic move to focus on the banking, wealth management, and investment banking/brokerages arms. Plus, it will help the balance sheet.

Any future growth that Wells Fargo may enjoy hinges on getting its house in order from a risk management perspective. This seems to finally be happening.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$45.67 (0.15%) $0.07
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$130.49 (0.81%) $1.04
Visa Inc. Stock Quote
Visa Inc.
V
$211.56 (1.44%) $3.01
BlackRock New York Municipal Income Trust Stock Quote
BlackRock New York Municipal Income Trust
BNY
$11.70 (1.65%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.