Wells Fargo stock rises as asset cap lift set to unlock new earnings drivers

The Federal Reserve’s asset cap has been the main brake on Wells Fargo’s (NYSE:WFC) growth for years. With it now gone, Goldman Sachs’ equity research team sees room for new, idiosyncratic earnings drivers to emerge. WFC shares gained 2.6% in Wednesday premarket trading.

Such tailwinds include the lender’s “ability to regain some of its lost deposit market share, which would fund additional growth in several businesses,” as well as higher cost savings from easing regulatory and legal spending, analyst Richard Ramsden wrote in a note.

As such, he estimated that Wells Fargo (NYSE:WFC) could see 14%-19% of earnings-per-share upside, or ~200-280 basis points of return on average tangible common shareholders’ equity (ROTCE) uplift.

On Tuesday, the U.S. central bank said the bank was no longer subject to the asset growth restriction the regulator imposed on the bank in 2018, saying the bank has met all conditions required by the consent order. Last week, Scharf said at a conference that he was “very, very confident” that the asset cap would be removed soon.

The $1.95T asset cap lift also gives Wells Fargo (WFC) the ability to expand its balance sheet space “over the medium term in a return-accretive manner by issuing preferred equity. That could yield ROTCEs of 11%-15%, Ramsden estimated

Goldman maintained its Buy rating on WFC, compared with the SA Quant system rating and the average Wall Street analyst rating, both at Buy, and the average SA analyst rating of Hold.

Last month, Evercore ISI’s John Pancari estimated a combined ~$1.19, or +18%, annual earnings-per-share benefit from the potential asset cap lift.