The embattled large bank Wells Fargo (WFC -0.10%) has really been down and out since its phony-accounts scandal came to light in 2016. That resulted in numerous lawsuits and fines, as well as a lot of work to repair the bank's reputation and regulatory infrastructure.

But after bringing on Wall Street veteran Charlie Scharf in 2019 to run the bank, Wells Fargo has undeniably started to make progress, with the stock more than doubling since its pandemic lows in late 2020. It currently trades with around a $172 billion market cap; can the bank get to $1 trillion over the next decade? Let's take a look.

What needs to happen

Following revelations of the phony-accounts scandal, in which employees at the bank opened credit card and depository accounts for customers without their consent, the Federal Reserve imposed an asset cap on the bank in 2018 limiting balance-sheet growth.

More than four years later the cap is still in place, and has cost the bank billions of dollars in profits at a minimum. Clearly for Wells Fargo to grow as it can, and really start to generate strong returns, it needs the asset cap to be removed.

It seems like the asset cap could still remain for a while, given that the bank has nine outstanding consent orders and Scharf has said that you can partially track the bank's progress by looking at how the consent orders start to expire or get terminated. But getting the asset cap removed is Wells Fargo's top priority, and management does seem to be making progress; I'd expect the bank to be able to get the cap removed within the next few years. Once it is removed, Wells Fargo will be able to trim more costs and grow revenue faster, which will accelerate profits from the current pace.

Even with the asset cap in place, Scharf has formed a plan to cut out $10 billion of annual costs, a process that is now well underway...and working. This, along with higher interest rates, can help the bank get a lot more efficient and drive much better returns. Scharf has said the goal is to exit this year with a run rate of a 10% return on tangible common equity (ROTCE), and then reach 15% as more of a medium-term goal. Asset cap or no asset cap, the bank is improving, and making strides toward much better financial results.

The path to $1 trillion

Banks tend to trade relative to their tangible book value (TBV, or net worth), so the faster they can grow TBV, the better. Top banks in Wells Fargo's peer group like JPMorgan Chase and Bank of America can reach 200% or 250% of their TBV in good times. When the asset cap wasn't in place, Wells Fargo was growing TBV at a fast clip:

WFC Tangible Book Value (Annual) Chart

WFC Tangible Book Value (Annual) data by YCharts.

Between 2012 and now, even with the asset cap, Wells Fargo still grew its TBV by about 68%.

That's pretty good considering we know the asset cap has cost the bank billions in profits. Scharf is also building out what could be a much more profitable bank by focusing growth on areas like credit card lending and investment banking. His cost-cutting initiatives will also bolster profits as well.

If the bank could generate a 15% ROTCE and consistently produce that for nine or 10 years, then Wells Fargo could in theory grow its tangible book value to somewhere close to $500 billion by 2032 if you figure in compounded growth. And then if the bank could trade at 200% or 250% of its TBV, like other top banks, then it could have somewhere near a $1 trillion market cap.

Will it happen?

Obviously, there are many factors at play here, like when Wells Fargo gets the asset cap removed and can really start to grow the balance sheet and get its returns closer to a 15% ROTCE. Wells Fargo still has a strong franchise, and I have confidence in Scharf's ability to execute.

But I think it's likely to take at least two or three years to go from a 10% to a 15% ROTCE. Then maintaining consistent returns over a long period of time will not be easy, especially because banks are so linked to the economy and are therefore affected by the broader economic environment and macro policy. Furthermore, capital returns to shareholders will also slow the growth of tangible book value.

Ultimately, I wouldn't call it impossible for Wells Fargo to achieve a $1 trillion market cap by the year 2032. But I think it's very unlikely, given that we don't know when the asset cap will be removed and that there is little room for error for the bank to reach $1 trillion. Still, I think that over the next decade, Wells Fargo can be a very solid investment that investors should definitely consider.