There has been a lot of speculation about the future of Wells Fargo (WFC -0.16%), given that the bank is currently in the midst of a turnaround story that shareholders are starting to rally behind. It has not been easy since the bank's phony-accounts scandal came to light in 2016, in which employees at the bank opened banking and credit card accounts without the consent of customers and sent the bank's future into disarray.

But after six grueling years and a lot of changes at the bank, let's take a look at where Wells Fargo could be in three years.

Wells Fargo is now a leaner operation

Since taking over as CEO in 2019, Charlie Scharf has long made it clear that Wells Fargo could benefit from becoming a more efficient operation. In early 2021, Scharf announced a large cost-cutting initiative in an effort to realize $8 billion of gross cost savings over a three- to four-year period.

Those initiatives included organizational structure optimization, branch rationalization and staffing, and implementing new technology such as new origination platforms that would ultimately turn into savings. That plan eventually would be extended to $10 billion of cost savings at the end of 2021.

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Image source: Getty Images.

So far, the bank seems to have made some solid progress on this front. In 2021, the bank cut $4 billion of gross expenses. This year, it's targeting $3.3 billion of gross cost saves, which will get the bank well on its way to hitting its ultimate goal.

And who knows, more could be coming. If you compare Wells Fargo to Bank of America (BAC 0.09%), which is a close comparison given that they're two of the largest commercial lenders, Wells Fargo still had 85,198 more employees and 882 more branches than Bank of America at the end of the first quarter. The two are different banks, and Bank of America has done a superb job of implementing technology. But Bank of America also has way more assets, so it does seem like there's further room for improvement at Wells Fargo.

Whatever happens, Wells Fargo should be able to reduce its efficiency ratio, which is a bank's expenses expressed as a percentage of its total revenue, so lower is better. Wells Fargo ended 2021 with a 69% efficiency ratio. In three years, I think the bank will be able to get that down below 60% by boosting revenue and using a combination of expense cuts.

The asset cap limits Wells Fargo

In early 2018, following the phony-accounts scandal, the Federal Reserve imposed an extremely punitive asset cap on Wells Fargo, which essentially prohibits the bank from growing its balance sheet until it can fix its regulatory issues. More than four years later, the asset cap is still in place, and it has now cost the bank billions in profits because Wells Fargo has not been able to grow its interest-earning assets like other banks have. 

Scharf has certainly done a lot to try to create a better regulatory framework at the bank. He has instituted a new organizational structure, implemented more risk officers across the bank, and created offices specifically dedicated to dealing with consumer complaints.

In early 2021, media outlets reported that the Fed approved a key proposal by Wells Fargo regarding the bank's plan to overhaul its risk management and governance structure. Wells Fargo still has to put that plan in place and have the Fed review it, a process that is hopefully already underway. But I would really think that in three years, seven years after the asset cap was put into place, it would be removed. It is by far the biggest obstacle standing in the bank's way.

Closing the gap

In three years, I would hope that Wells Fargo, which has always had a strong franchise, is a much leaner organization and will hopefully no longer have the limiters on its balance sheet from the asset cap. This should allow the bank to close the valuation gap between itself and its stronger peers, like Bank of America and JPMorgan Chase (JPM 0.51%).

Wells Fargo stock currently trades at roughly 123% to its tangible book value (TBV), or net worth. In contrast, Bank of America trades at 150% and JPMorgan trades at 172% to TBV, so there should be a significant upside ahead for Wells Fargo stock if the bank can execute.