Why Wells Fargo Still Has Plenty Of More Upside

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.