Banking on the Wells Fargo Tax Windfall
For Wells Fargo & Co., is the worst over? The scandal-plagued bank's recent stock revival suggests yes, maybe it is. But even if there are more revelations to come, there's a good chance that the shares may hang onto its gains.
While it continues to lag rivals and the benchmark U.S. bank index since last year's presidential election, the San Francisco-based lender has returned to favor with investors. Its stock has soared nearly 12 percent since Thanksgiving and outperformed the KBW Bank Index, which has climbed almost 9 percent over the same period. On Wednesday, Wells Fargo touched an all-time high in intraday trading.
There are a few reasons for investors' renewed interest in Wells Fargo. Some may be operating under the assumption that they're unlikely to be blindsided by any more potentially negative news, in part because the bank's various internal reviews and risk and compliance improvements should have uncovered any other meaningful issues by now. 1 The stalwart presence of Warren Buffett's Berkshire Hathaway Inc. -- the bank's biggest shareholder -- provides another vote of confidence. And a hiccup-free presentation by Wells Fargo CEO Tim Sloan at the Goldman Sachs conference last week also managed to buoy confidence about its future.
Perhaps most importantly, investors are increasingly comfortable about the prospects for tax reform. Obviously, it's far from a lock but I see where they're coming from: Final legislation and a 21 percent corporate tax rate could become law as soon as next week.
At a time when many of the big banks are fully priced -- at least in the eyes of many Wall Street analysts -- it's understandable that investors are revisiting Wells Fargo, even though it's poised to only meet the low end of its annual profitability targets this year. The fact that it is projected to be the biggest U.S. bank beneficiary of a lower tax corporate tax rate is hard to ignore:
To be sure, Wells Fargo's troubled past may continue to dog the bank, and fresh issues may yet arise. Just this week, the Navajo Nation sued the lender for alleged predatory practices, another setback to the restoration of Wells Fargo's reputation. But even if the bank is eventually forced into settlement, fines or both, its bottom line is unlikely to be severely damaged -- that is, as long as it can shore up its standing with customers and retain market share.
For now, all eyes are on tax reform. If or when it's enacted, an inevitable uplift in the bank's profitability -- while not expected to be immediate -- should herald further gains.
As an example, in August, it boosted its estimate of potentially fake accounts.
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