What happened
Shares of Wells Fargo (WFC 3.90%) zoomed 50% higher in the first six months of 2021, according to data provided by S&P Global Market Intelligence. Much like the rest of the banking sector, Wells Fargo benefited from the successful deployment of COVID-19 vaccines, the reopening of the economy, and strong credit quality that held up through the brunt of the pandemic.
But unlike some of its peers, Wells Fargo also experienced its own unique catalysts related to regulatory matters that have long plagued the bank, and new efficiency initiatives that pleased investors.
So what
As many who follow the bank likely know, it came to light in 2016 that Wells Fargo had fraudulently opened millions of savings and credit card accounts without the authorization of its customers.
Along with other punishments, the Federal Reserve placed a $1.95 trillion asset cap on the bank, which now essentially prevents the bank from growing its balance sheet. This really caught up with Wells Fargo last year when the Fed abruptly dropped interest rates from 2% to zero, severely cutting into Wells Fargo's lending profits. Wells Fargo saw 2020 profits fall a whopping 90% from 2019, and also cut its dividend 80% last year.
Image source: Wells Fargo.
But early this year, Wells Fargo CEO Charlie Scharf announced an initiative that is expected to result in $8 billion in gross cost savings over the next three or four years, which should play a big part in improving the bank's expense structure.
Then in February, media outlets reported that the Fed had approved the bank's risk-management and governance overhaul proposal, one of the biggest steps to date that Wells Fargo has taken toward getting its asset cap removed. Wells Fargo reported $4.3 billion in profits in the first quarter of the year.
What now
Wells Fargo is currently trading at 128% to tangible book value (equity minus goodwill and intangible assets). I like Wells Fargo at this level and believe there is upside. The bank is going to continue to benefit as loan growth rebounds and when the Federal Reserve raises rates. Wells Fargo also recently doubled its quarterly dividend to $0.20 per common share and authorized $18 billion of share repurchases over the next year.
Additionally, the bank will eventually get the asset cap removed, keep cutting expenses, and grow revenue at a much healthier rate, which will result in much stronger earnings per share and better returns for investors.
