Wells Fargo ‘s run of form continued Wednesday, with shares hitting another 52-week high. Wall Street analysts see more upside ahead for what’s been the best-performing major U.S. bank stock in 2024. In fact, the stock’s session highs above $58 per share Wednesday were multiyear highs and only just over 13% away from all-time highs set back in January 2018. Shares of Wells Fargo have surged nearly 18% year-to-date, compared to the S & P 500 ‘s 8.5% advance over the same stretch. Peers like JPMorgan and Goldman Sachs have gained more than 12% and 2%, respectively, since the start of 2024. Conversely, Morgan Stanley — the portfolio’s other financial name —has tumbled 4% year-to-date. Elevated borrowing costs, signals of more lenient bank regulation, and management’s strides to cut costs are all seen as upward drivers for Wells Fargo. In recent interviews with CNBC, top sector analysts, RBC Capital Market’s Gerard Cassidy and Piper Sandler’s Scott Siefers, broke down three key tailwinds for the stock this year. 1. Higher for longer Both analysts said a higher-for-longer interest rate environment creates a favorable setup for a money center bank like Wells Fargo. For context, the Federal Reserve once again left rates unchanged in a range of 5.25% to 5.5% at its January meeting. Central bankers have raised borrowing costs 11 times since March 2022 in an intensive effort to cool stubborn inflation. The last hike was back in July — and by the start of 2024, market expectations for Fed cuts were up to six. But a resilient economy and a recent uptick in inflation have brought that number way down, with the CME FedWatch Tool putting better than 50% odds on June as the first cut. Jim Cramer has been saying for weeks now that the Fed does not need to risk reigniting inflation with cut rates when the economy has been so strong. History has shown that bank funding costs tend to stabilize about six months after the Fed finishes tightening, RBC’s Cassidy said. “Cash coming off your loan and securities portfolios, that cash is reinvested at higher yields than the securities that are maturing or the loans that are paying off.” This should result in better net interest income (NII) figures for 2024, he added. “We think [this tailwind] is going to surprise people that Wells and others could see better net interest margins, and net interest revenue growth in 2024, assuming the Fed doesn’t cut rates as aggressively as some people thought back in January,” Cassidy said. A favorable rate setup could help Wells Fargo beat management’s “very, very conservative” NII guide for 2024, Piper’s Siefers also said. That NII outlook , which had assumed five Fed rate cuts this year, sent the stock tumbling more than 3% on fourth-quarter earnings day back on Jan. 12. WFC YTD mountain Wells Fargo (WFC) year-to-date performance At the time, the Club wrote that “if the Fed ends up cutting rates less aggressively than what the curve suggests, it could mean upside to Wells Fargo’s NII forecast.” Our earnings commentary also argued that the bank’s efforts to improve its efficiency ratio — by rightsizing its business and cutting costs in different ways — would likely offset this weaker guidance. “There’s a sense among investors that Wells has really started out with punitive guidance, that is very achievable,” Siefers added. “In a perfect world, if rates hovered higher for longer then Wells might be able to beat that guidance over the course of the year.” As the expectations for Fed cuts this year have been coming down, Wells Fargo stock has been climbing. 2. Efficiency push Wells Fargo management has done a great job of cutting back costs, Siefers said, agreeing with the Club’s take on expected improvement in the bank’s efficiency ratio. With Charlie Scharf as CEO since 2019, the bank has closed branches, conducted a series of layoffs, and significantly shrunk its U.S. mortgage business to adapt to an uncertain macro environment. “What does that mean,” Siefers asked and answered, “it means there’s a multiyear cost opportunity there despite some of these investments they’ve had to make in areas such as compliance.” Scharf has been working hard and investing in the cleanup of Wells Fargo’s misdeeds that predated his tenure. During nearly five years at the helm, the CEO has cleared six regulator consent orders, including one last month that’s believed to be one of the reasons the Fed imposed an asset cap of $1.95 trillion on the bank back in 2018. The Club believes that lifting the cap is a “when, not if” scenario, but it’s looking like it may not happen until next year. 3. Capital returns Both analysts highlighted the potential for more stock buybacks and better dividends as another tailwind. The bank is well capitalized, as we were reminded from the Fed’s annual stress test , and should be able to return more of these funds to shareholders, the analysts said. Fed Chairman Jerome Powell said last week that a sweeping proposal to change industry regulations, known as ” Basel III Endgame ,” will be significantly revised. Cassidy said Wells Fargo, along with the other major leaders, may be able to utilize more capital than anticipated after signals that capital requirements for large banks may not be as stringent as previously thought. “It looks like the Basel III Endgame regulatory requirements are going to be watered down considerably,” Cassidy said. “This is very positive for the biggest banks because they have plenty of capital to handle the original proposal requirements.” He predicted, “There’s going to be more stock repurchases.” To be sure, no official announcements have been made regarding any final Basel regulatory rules or any updated capital return plans from Wells Fargo. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Wells Fargo‘s run of form continued Wednesday, with shares hitting another 52-week high. Wall Street analysts see more upside ahead for what’s been the best-performing major U.S. bank stock in 2024.
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