Back in Favor

Banking on the Wells Fargo Tax Windfall

The scandal-plagued bank is back in favor with investors, and earnings gains from the Republican-led tax plan may keep it that way.
Photographer: Justin Sullivan/Bloomberg
WELLS FARGO & CO
+0.36
At Closing, February 23th
59.17 USD

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.

Time to Play Catch Up?

Wells Fargo has meaningfully trailed rivals and the benchmark index, in part due to the fallout from its sales-practices scandal

Source: Bloomberg

*Data at midday 12/13/17

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. 

Rebound

After a tough 2017, Wells Fargo shares have rebounded in the past couple of weeks, in part due to the possible boost from tax reform

Source: Bloomberg

*Some analyst price targets do not factor in so-called blue sky scenarios such as tax reform and multiple rate hikes in coming years

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:

Many Happy Returns

If a tax bill is signed, this is how the biggest U.S. banks could fare

Source: KBW

*Assumes 20 percent rate. This could end up being 21 percent, after a compromise.

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. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. As an example, in August, it boosted its estimate of potentially fake accounts.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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