After seven years of tough Fed restrictions, this bank is about to be set free
Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Banks can be incredibly accident-prone. Fat-fingered trades, compliance failures, loan-book blow-ups and run-ins with regulators seem to be par for the course across many of the world's big lenders.
A case in point is Wells Fargo, the US-headquartered multinational financial services group. It has found itself mired in controversy several times over the years, including after it admitted levying insurance charges on people with car loans without them knowing about it.
But its biggest snafu came in 2016, when staff were found to have created 1.5 million fake deposit accounts in order to meet aggressive sales targets. As well as public opprobrium and hundreds of millions in fines and settlements, the scandal led, in 2018, to the Federal Reserve imposing a $1.95 trillion asset cap on the bank.
In essence, this limited the bank's ability to expand its balance sheet, substantially grow its loan book or power ahead with its trading business until America's central bank was happy it had put its house in order.
Its rivals on Wall Street, including JP Morgan and Citigroup, were able to expand their market share, while Wells Fargo was limited in what it could do.
The good news for the bank, and for its shareholders, is that the Fed is reportedly preparing to lift the cap during the course of this year after Wells Fargo managed to resolve a string of regulatory actions against it.
While the bank's shares have gained ground in anticipation since Reuters first reported the likely move late last year, they remain attractive compared with peers.
While there are now worries that a slowdown in the US economy could hit banks hard, and share prices in the sector have fallen to reflect this, Wells Fargo is nevertheless very popular with world's best-performing fund managers. It is backed by 28 of these investors who are each among the top 3pc of the more than 10,000 equity managers whose performance is tracked by financial publisher Citywire.
The company is rated AAA by Citywire, based on the high level of smart money backing. Its shares are also a constituent of Citywire's Global Elite Companies index which tracks around 80 of the very best ideas from the around 6,000 stocks across top managers' portfolios.
Wells Fargo's New York-listed shares are available through the UK's main stockbrokers but buyers should be sure to fill in forms for minimising withholding tax and check with their provider about any additional dealing charges.
The potential for Wells Fargo to be free to grow is not the only reason to buy the shares. The group beat analysts' forecasts in the fourth quarter, driven by a stellar performance in investment banking, an area the bank has been prioritising given it can be very lucrative and is also 'asset light', which means it is not a drain on the constrained balance sheet.
Wells Fargo is also forecasting an increase in net interest income – the balance of what it charges borrowers and the amount it pays out to savers and a closely watched measure of bank profitability.
The picture is complicated by Trump's blizzard of tariffs earlier this month, which, if it plunges the US into a recession, will be bad for all banks.
Yet, although this makes any bank a reasonably risky buy, Wells Fargo's relative weakness against bigger peers also means it potentially has less to lose and more to gain from swings in sentiment. During the market rout that followed Trump's tariffs announcement, shares in the bank fell less than those of Citigroup, for example, though admittedly on a par with JP Morgan.
For now, Wells Fargo's various businesses are looking resilient. The consumer division, which would be expected to be vulnerable in a downturn, has been showing signs of growth, the bank said in January. Provisions for potential credit losses have been falling.
The bank has been making progress in its wealth management arm and the surge in growth of its investment banking unit shows it can compete with the biggest players for deal fees.
Wells Fargo's shares trade on 11 times next year's forecast earnings and carry a prospective dividend yield of 2.6pc. One for the longer term.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
29 minutes ago
- Reuters
Australia has stabilising role amid rising global division, says PM Albanese
SYDNEY, June 10 (Reuters) - Australia will seek to disprove the "corrosive" idea that democratic institutions are failing amid significant global uncertainty, and play a stabilising role in the region, Prime Minister Anthony Albanese said on Tuesday. In his first major speech since his centre-left Labor party was re-elected in May, Albanese said the rise of far right and far left populism elsewhere in the world was because people felt they did not have a stake in the economy and that institutions were not working for them. "We are living in a time of significant global uncertainty - and that reaches beyond just economic instability, it is the more corrosive proposition that politics and government and democratic institutions, including a free media, are incapable of meeting the demands of this moment," he said in a speech to the National Press Club in Canberra. Albanese said that while some "cynically seek to harvest it", the Australian government saw its responsibility was to disprove such perceptions. He also referred to an Australian journalist hit by a rubber bullet during protests on Sunday in the U.S. city of Los Angeles as "horrific", and said that his government had contacted the U.S. over the incident to say it was not acceptable. Albanese is expected to meet U.S. President Donald Trump for the first time next week on the sidelines of the G7 meeting in Canada, where the security allies will discuss tariffs and a request from the United States for Australia to increase defence spending from 2% to 3.5% of gross domestic product. Albanese has declined to publicly commit to a defence spending target, saying Australia would focus on capability needs, such as local manufacturing of missiles. "I think that Australia should decide what we spend on Australia's defence," he said on Tuesday, adding the country's ties in the Pacific and Asia were also important for its security. Australia was focussed on strengthening relationships in Asia, amid strategic competition in the region, he said.
North Wales Chronicle
an hour ago
- North Wales Chronicle
Luxury UK car makers hit by ‘multiple geopolitical headwinds'
The Society of Motor Manufacturers and Traders (SMMT) said companies such as Aston Martin, McLaren and Morgan are having to cope with volatile trading conditions, decarbonisation rules and production cost pressures. The study found the total turnover of the UK's high-value, small-volume manufacturers in 2024 was more than £5.5 billion, with around nine in 10 of their vehicles shipped overseas. They were responsible for just 4% of the UK's car production, but accounted for 12% of its value. In excess of 15,000 people are employed in high-skilled, well-paid jobs by the companies, the SMMT found. The report stated: 'The UK's small volume manufacturers face a series of challenges … (which) threaten competitiveness and growth.' SMMT chief executive Mike Hawes said: 'Britain's luxury, performance and niche vehicle makers are exemplars of automotive design, engineering and manufacturing – and a quintessential British success story. 'Government rightly recognises the importance of these high-value and iconic brands to the UK economy and, amid multiple geopolitical headwinds, the industry is looking to work together to ensure the sector can not just survive but thrive. 'A successful sector would deliver the economic growth, well-paid jobs and exports that Government craves, helping keep Britain firmly on the global automotive map.' Industry minister Sarah Jones, said: 'Our luxury automotive manufacturers are iconic British brands recognised worldwide, and this report rightly highlights the huge contribution they make to the UK economy. 'We're ensuring our carmakers go from strength to strength as we deliver our Plan for Change, and we've already secured landmark trade deals with the US and India, which will cut tariffs for the sector and create new export opportunities. 'Our modern industrial strategy will set out a long-term plan to support our manufacturers, including by creating the right conditions for increased investment, bringing growth, jobs and opportunities to every part of the UK.' The UK-US trade deal was confirmed in a call between Prime Minister Sir Keir Starmer and US President Donald Trump on May 8. It included American tariffs on UK cars being 10% for the first 100,000 vehicles exported. Mr Trump had previously set the tariff rate on car exports to the US at 27.5%.
Reuters
an hour ago
- Reuters
Breakingviews - TV-burdened WBD will struggle to cut the cord
NEW YORK, June 5 (Reuters Breakingviews) - David Zaslav's fleece vest provides limited protection from the chilling effect of his corporate balance sheet. The Warner Bros Discovery (WBD.O), opens new tab boss is trying to eject the collapsing traditional TV business, but $34 billion of mostly merger-related net debt complicates the plan. The time to split was yesterday. WBD, a $24 billion media conglomerate spanning CNN to Looney Tunes, flagged the possibility of a breakup last year when it restructured into two operating divisions: one that houses cable networks such as Discovery and another for its HBO streaming service and Warner Bros. movie studio. The step laid the groundwork to follow a similar path as cable operator Comcast (CMCSA.O), opens new tab, where CEO Brian Roberts outlined plans to move some TV assets into a standalone company. Financial engineering prospects keep getting tougher by the day. S&P Global, alarmed by the relentless decline in broadcasting and its drag on other businesses, downgraded, opens new tab WBD's credit rating to junk status. The company's stock price also has plummeted from a peak of about $77 a share in March 2021 to around $10. Zaslav is confronted with a conundrum. The spinoff cannot be sent packing with too much more debt than equity, which would tempt friction with bondholders. At 5 times estimated 2026 EBITDA of $5.5 billion, according to Visible Alpha, and if general expenses are evenly divided, the TV enterprise would be independently worth $28 billion. With 60% debt, the same proportion as now, it would be carrying $14 billion. On that basis, WBD's remaining $20 billion of net borrowing stays with streaming and the studio. Assume that business is valued at half of where Netflix (NFLX.O), opens new tab trades, or 16 times next year's EBITDA, and the assets are worth $56 billion. On paper at least, the math suggests WBD's equity would be worth twice as much as today once cleaved in two. And yet in that scenario, the HBO side also gets stuck with debt equivalent to 5 times its $3.5 billion in projected 2026 EBITDA. That amount of leverage – 30% higher than at the parent now – would potentially impede its ability to compete effectively by hamstringing investment in new programs and technology. These discouraging figures increase the chances of both companies getting frosty receptions from investors. Zaslav may want to warm up to the idea of selling the TV business instead. Follow Jennifer Saba on Bluesky, opens new tab and LinkedIn, opens new tab.
