Is it time to add the stock to your portfolio?

Shares of Wells Fargo & Company WFC is up 46.3% year-to-date, compared to an industry increase of 44.4%. The stock also performed better than its competitors, JPMorgan JPM and Morgan Stanley MS, in the same period.

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The stock is trading above its 50-day moving average, indicating bullish sentiment among investors.

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Let’s find out the reasons behind WFC’s solid performance this year and how we can leverage the stock in 2025.

At the Goldman Sachs 2024 US Financial Services Conference on Dec. 11, Wells Fargo CEO Charlie Scharf expressed confidence in the bank’s progress in addressing compliance issues following the year-long fake account scandal and outlined its efforts to implement Risk controls. “For each of our consent orders, for each of our regulatory services, we have extremely detailed plans that have been reviewed by the regulators,” Scharf explained.

Last month, Reuters reported that WFC was in the final stages of meeting its regulatory requirements to lift the $1.95 trillion asset cap. This asset cap was introduced in 2018 after the fake account scandal was uncovered. According to the report, the asset cap could be lifted in the first half of 2025 if the bank resolves its risk management and compliance issues. However, the decision to lift the restriction requires a vote by the Federal Reserve Board of Governors.

In February 2024, the 2016 consent order issued by the Office of the Comptroller of the Currency related to unsafe sales practices was revoked. This development was an important step towards the possible lifting of the asset cap.

Given that loans are among the largest assets a bank can hold, lifting the asset cap will mark a turning point for Wells Fargo. This will enable the bank to offer loans without restrictions, supporting its revenue expansion and long-term growth.

Wells Fargo’s prudent cost management initiatives have supported the company’s financial position. Since the third quarter of 2020, the company has been actively committed to cost-cutting measures, including streamlining the organizational structure, closing stores and reducing staff. In the third quarter of 2024, the company’s headcount decreased by almost 25% compared to the third quarter of 2020.

Wells Fargo continues to invest and optimize its branch network. The location strategy for branches is being chosen more deliberately, as the number of branches has decreased from 5,229 at the end of the third quarter of 2020 to 4,196 as of September 30, 2024.

As a result of these initiatives, WFC’s noninterest expenses decreased 13.8% at the end of the third quarter of 2024 compared to the third quarter of 2020.

The Federal Reserve’s aggressive start to monetary easing is likely to support WFC’s net interest income (NII) over time. The Fed has cut interest rates twice since September. Currently, the Fed’s key interest rates are around 4.5-4.75%. Fed funds futures now indicate a 97.1 percent chance of a 25 basis point rate cut at the FOMC meeting later this week, according to CMEGroup’s FedWatch tool.

The rate cut is a positive development for WFC, which is facing increasing funding cost pressures. While high interest rates have led to a significant increase in NII, they have increased funding and deposit costs, thereby reducing the company’s net interest margin (NIM).

Wells Fargo’s NII and NIM suffered from increased funding costs as the high interest rate environment weighed on them. Management expects NII to decline by 9% in 2024 compared to the same period last year. However, as the central bank is expected to further cut interest rates, it will support NIM expansion in the future.

Wells Fargo rewards its shareholders generously. In July 2024, the company announced a 14% dividend increase to 40 cents per share over the previous payout. The company has increased its dividend five times in the last five years.

WFC has an annual dividend growth rate of 10.8% with a payout ratio of 30%.

Wells Fargo also has a stock repurchase program. In July 2023, the company’s board approved a $30 billion share repurchase program. In the first nine months of 2024, Wells Fargo bought back more than $15 billion in shares. As of September 30, 2024, the Company had the authority to repurchase up to $11.3 billion of common stock.

WFC has a strong liquidity position with a liquidity coverage ratio of 127% as of September 30, 2024, exceeding the regulatory minimum of 100%. Its liquid assets (including cash and bank receivables and interest-bearing deposits with banks) totaled $185.5 billion at the same time.

Given the robust capital position and ample liquidity, the company’s capital deployment activities appear to be sustainable.

Over the past 60 days, the Zacks Consensus Estimate for WFC’s 2024 and 2025 earnings has increased. The estimate for 2024 assumes a decline of 2.9% compared to the previous year, while the metric for 2025 is expected to increase by 3.9%.

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Find the latest EPS estimates and surprises in the Zacks earnings calendar.

From a valuation perspective, Wells Fargo appears reasonably cheap compared to the industry. The company is currently trading at a discount, with a forward 12-month forward P/E multiple of 12.89X, which is below the industry average of 14.16X.

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The stock is also significantly cheaper than MS and JPM’s current 12-month P/E ratios of 16.20X and 14.28X, respectively.

Wells Fargo’s progress in addressing compliance issues will help raise the asset cap. This will allow the company to offer loans without restrictions, thereby helping to increase sales. Its progress on efficiency initiatives such as: Additional measures, such as reducing branches and footprint, will help reduce costs and drive profit growth.

With a decent liquidity profile, the capital distribution exercise appears to be sustainable. The Fed’s rate cuts will support NII and NIM growth in the long term. The stock is worth considering given its cheap valuation and positive estimate revisions.

Therefore, investors should consider investing their money in WFC at the current price levels to earn solid returns in the long term.

Wells Fargo currently has a Zacks Rank #2 (Buy). You can see You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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