Why Wells Fargo Still Has Plenty Of More Upside

Loading...
Loading...

Wells Fargo & Co WFC wowed Wall Street with a big second-quarter earnings beat, but Bank of America analyst Ebrahim Poonawala said this week’s Wells Fargo rally may be just getting started.

Impressive Guidance: As impressive as Wells Fargo’s second-quarter numbers were, Poonawala said the market was likely more bullish on management’s commentary on the bank’s expectations to achieve a return on tangible common equity (ROTCE) of 10% in 2022 and a longer-term sustainable ROTCE of 15% as interest rates rise.

In addition to improving internal performance, Poonawala said Wells Fargo is particularly well-positioned to return capital to investors. The bank’s common equity tier one (CET 1) capital ratio ended the quarter at 12.1%, well above the required regulatory minimum of 9.1%.

See Also: Wells Fargo Shutting Down Personal Lines Of Credit: What It Means To Consumers

Capital Return Potential: Given its current capital cushion, Poonawala is estimating Wells Fargo could complete $18 billion in buybacks in the next 12 months alone. Wells recently doubled its dividend to 20 cents per quarter, but Poonawala is also predicting an additional 25% dividend hike in the third quarter, which would bring the bank’s payout ratio up to about 23% of his 2022 EPS target.

After this week’s gains, Wells Fargo shares are up about 50% year-to-date, but Poonawala said it’s still way too early for investors to be cashing out.

“While mgmt. was very clear during today’s earnings call that addressing all the regulatory issues remains a ‘multi-year journey,’ we believe that faster than expected progress on this front could be a significant catalyst, especially if it leads to the lifting of the asset cap,” Poonawala wrote in a note.

Benzinga’s Take: Wells Fargo has certainly put up some impressive numbers in recent quarters, but investors shouldn’t be surprised if the stock continues to trade at a valuation discount to peers as long as its asset cap remains in place. The potential lifting of the asset cap would likely be a huge bullish catalyst for the stock, and Poonawala seems to think it could be coming at some point in the near future.

Loading...
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsTrading IdeasBank of AmericaEbrahim Poonawala
We simplify the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...