(San Francisco Business Times) - Wells Fargo once said that it could not meet a key growth goal with its Fed-imposed asset cap in place. Here's why the bank's stance has now changed.
Rising interest rates have boosted Wells Fargo’s confidence that it can reach an important growth target even as it operates under a $1.95 trillion asset cap the Federal Reserve imposed in 2018 as punishment for its fake accounts scandal and other misdeeds.
The San Francisco bank had previously said that it would not be able to reach its goal of a 15% return on tangible equity without eventually getting the asset cap lifted. But rising rates help make lending more profitable for Wells and the rest of the banking industry. Banks can raise rates on many outstanding and new loans faster than they have to increase what they pay for deposits and other sources of funds, boosting lenders’ profit margins.
“The question will be where rates go and then what impact that has on the economy and the environment we’re in,” Wells Fargo Chief Financial Officer Mike Santomassimo said at a Credit Suisse investment conference Feb. 17. “We said a year ago we would need that (cap) lifted to get there. But rates have changed. We feel really confident that the business we have should be able to get there.”
Santomassimo anticipates short-term rates will continue to rise — expectations shared by many. Bank of America (NYSE: BAC) economist Ethan Harris told those attending the San Francisco Business Times 2022 Mayors' Economic Forecast Feb. 18 that he anticipates the Fed will boost short-term rates in seven quarter-percentage increases this year for a total rate jump of 1.75 percentage points, with additional rate hikes in 2023 totaling another 1 percentage point.
“We’re going to go from a world of zero rates, or effectively zero rates, from the Fed to close to 3% interest rates,” said Harris, who is BofA’s head of global economics. “That’s going to prove to be a bit of a challenge for an economy that’s gotten used to very, very low interest rates.”
Still, one analyst who liked what he heard from Wells Fargo last week about the impact of rising rates on that bank’s performance is Dick Bove of Odeon Capital Group.
“The bank continues to move in the right direction,” Bove told clients in discussing Wells Fargo, which is scheduled to announce first quarter earnings on April 14. “First quarter results are likely to be quite positive since first quarter 2021 was very weak.”
Bove, who maintained his “buy” recommendation on Wells Fargo’s shares, cautioned that Wells Fargo’s stock buybacks may be limited due to expectations for new, tougher capital regulations.
By Mark Calvey
Senior Reporter, San Francisco Business Times
