Wells Fargo & Co

Wells Fargo reported mixed second-quarter 2026 earnings results on July 14, sending shares down a low-single-digit percentage as the net interest margin trajectory highlights the firm's aspirational changes.

Why it matters: Wells Fargo has long swum in its own lane with a scale and business mix that blended the attractive elements of a money-center bank with a regional bank, but now, one year removed from the lifting of the asset cap, the firm is taking steps to look closer to a traditional money-center bank. Unshackled by regulators to increase the balance sheet, management has deployed significant capital to expand its trading desk, hoping it will spur ancillary fee income growth that offsets the NIM compression associated with the lower-spread securities financing business in the interim. With net interest margins down 17 basis points over the past two quarters, we believe the decision to sacrifice the relative strength of its cost-advantaged deposit franchise to grow its trading business is unlikely to improve its competitive positioning within the banking universe.

The bottom line: After digesting the second-quarter results for wide-moat Wells Fargo, we are modestly raising our fair value estimate to $90 from $88, viewing shares as slightly undervalued. The fair value increase was chiefly due to a 50-basis-point reduction in the midcycle efficiency ratio to 58.2%, as the dissipation of legacy compliance costs associated with the lifting of regulatory penalties provides enhanced visibility into the firm's capability to drive positive operating leverage. While our views surrounding near-term net interest income have become less rosy due to the prioritization of the trading franchise, our updated interest rate forecast incorporates a delay in rate cuts until 2027, effectively offsetting the impacts of a lower-yielding interest-earning asset mix.

The decision to transform Wells Fargo appeared to predate the lifting of the asset cap, as the firm went on a hiring spree, hiring over 125 investment banking managing directors since 2019. We ultimately see the institutional trading business as difficult to forge a moat in isolation, with even well-scaled businesses like Goldman Sachs struggling to materially outearn its cost of capital over the cycle in this franchise, yet the business functions as a crucial facet of the broader ecosystem that is simply monetized via the corporate and investment banking franchises.

Though Wells Fargo made a material ascent up the league tables over the years, finishing eighth in Dealogic's total global revenue rankings in 2024 and 2025, the total profit pool in investment banking is not particularly high, as evidenced by investment banking contributing only 3.5% of Wells Fargo's net revenue in 2025. Even if the firm doubled the investment banking fees it generated in 2025 to surpass Citigroup for fifth place, the 3.5% revenue uplift is simply not worth the growth of the institutional trading franchise necessary to reach these goals, particularly given the lack of a global footprint that Wells Fargo currently has relative to the larger incumbents.

Further, Wells Fargo has built a strong commercial and corporate banking franchise with a smaller trading operation than its money-center peers, which is highly attractive from a returns-on-capital perspective. Rather than try to emulate its peers just because regulators have allowed it to grow its balance sheet again, we think investors would rather see the firm stick to its core competencies and maximize returns on capital utilizing the competitive advantages it has spent decades forging, evidenced by a negative reaction to an otherwise strong earnings report.

We are increasing our fair value estimate for Wells Fargo to $90 per share from $88 per share, primarily due to a more constructive view on the long-run efficiency ratio as compliance costs associated with regulatory penalties roll off and provide improved visibility into the positive operating leverage of the franchise.

Consistent with other major financial institutions in our coverage, the primary drivers of Wells Fargo's valuation remain asset growth, the trajectory of its net interest margin, and the continued expansion of its core fee-earning businesses, particularly in wealth management, commercial banking, and trading. Ultimately, our revised fair value estimate equates to 1.95 times our 2026 projected tangible book value for the bank.

Digging into the drivers underpinning our fee-income growth forecasts of 3.9% over the decade ahead, we see modestly stronger revenue-generation runways in wealth management advisory fees, deposit- and lending-related fees, and investment banking fees.

For wealth management advisory fees, we forecast average assets under advisory to grow at an annualized rate of 5.5%, driven exclusively by market appreciation, as we forecast average net new asset flows of negative 0.3% over the next decade and modest fee compression, culminating in investment advisory revenue growth of 3.9%.

Turning to lending and deposit-related fees, we forecast growth at an annualized rate of 4.9% over the next 10 years, driven exclusively by increased lending and deposit-gathering activity after the lifting of the asset cap and new risk weights in the Basel III re-proposal, as we forecast net fee yields for each to compress across each segment.

Within the corporate & investment banking, or CIB, segment, we believe that investment banking revenue should hold up relatively well given the improved external environment for the business, married with Wells Fargo’s deep network of corporate client relationships that yield consistent deal flow. To that tune, we believe that Wells Fargo will be able to gain slight market share in advisory and debt capital markets, while we forecast slight market share loss in equity capital markets, as we believe the breadth of the trading desk makes it less competitive than traditional bulge bracket competitors in landing large equity capital markets deals. While Wells Fargo has deployed significant capital to scale its trading operation to more closely resemble its money center peers, we ultimately view the firm's lack of global reach as prohibitive and unlikely to surpass incumbants, in addition to the belief that trading revenue is nearing cyclical highs for the industry and should experience a material correction in 2028, leading us to forecast a mere annualized growth rate of 2.0% over the next decade.

Regarding the balance sheet, we view Wells Fargo as relatively insulated, even in a rate-cutting cycle we forecast to resume in 2027, as the headwinds of rate cuts should be more than offset by balance sheet growth, forecasting net interest income growth of 3.5% and 4.0% in 2026 and 2027, respectively. Updated risk weights from the Basel III Endgame re-proposal, particularly within residential real estate, should enable Wells Fargo to support its lending portfolio with slightly less common equity Tier 1 capital, improving the bank’s return profile.

Finally, expenses have been another vital point of interest with Wells Fargo, particularly as one-time costs associated with severance, fines, and consent orders should not persist. This ultimately leads us to believe that expense growth will remain manageable, projecting a 1.8% average annual noninterest expense growth over the next 10 years. Married with our solid revenue growth outlook, this cost discipline drives our expectation for Wells Fargo to achieve a 58.2% long-term efficiency ratio, in line with its moaty bank competitors, despite operating with a significantly higher mix of investment banking and wealth management.

We believe that Wells Fargo has utilized the twin pillars of cost advantages over its competitors and customer switching costs to forge a wide economic moat, suggesting it is more likely than not to generate excess risk-adjusted profits over the next 20 years. Wells Fargo weathered significant regulatory penalties over the past decade, inclusive of over $6.7 billion in fines and the first-ever-implemented asset cap, which prohibited the bank from growing its balance sheet above $1.95 trillion from 2018 until being lifted in mid-2025, yet the bank still averaged a return on tangible common equity of 12.3% over the trailing decade, comfortably edging our estimated 9% cost of equity, a testament to its sticky, low-cost deposit franchise. Looking ahead, we expect returns to improve considerably and forecast the firm to generate annualized returns on tangible common equity of 15.0% over the next decade as it transitions from a defensive posture to a period of more aggressive expansion now that it has been excused from the penalty box.

Before further detailing the moat sources and individual segments, we think it’s imperative to describe the regulatory penalties faced by Wells Fargo to better contextualize how depressed the bank’s earnings profile was relative to our future forecasts. By capping Wells Fargo’s ability to grow its assets, the bank was, by extension, forced to take active measures to prevent material deposit growth on the liability side of balance sheet, such as turning away nonoperating cash from its commercial clients. As a result, Wells Fargo only increased its US deposits by 13% from 2017 through to the first quarter of 2025 (the asset cap was lifted during the second quarter of 2025) while the average balance sheet and deposit growth at the three other money-center banks during this timeframe were 48% and 58%, respectively. If we were to assume that Wells Fargo grew its balance sheet and US deposit franchise at the same rate as the other money-center banks during this timeframe, the bank could have attracted roughly an additional $394 billion in domestic deposits, tantamount to the tenth-largest deposit base in the US on a stand-alone basis. Because low-cost deposits are the cheapest and most stable capital that banks can use to fuel their lending operations and securities portfolios, the impact to profitability of the foregone growth is even higher; we estimate that Wells Fargo’s net income would have been about one-third higher in 2025 if not for the asset cap, with significant implications for the firm’s returns on tangible common equity. While the bank cannot immediately recover foregone historical growth, it’s important to note that since the asset cap was lifted in the middle of 2025, Wells has already grown its deposit base by roughly 5% while simultaneously lowering its deposit costs by 14 basis points, setting a strong tone for the bank’s more constructive next chapter after the asset cap removal.

In addition to the restriction on balance sheet growth, Wells Fargo endured significant regulatory fines and heightened compliance costs over the preceding decade, which artificially raised its efficiency ratio above what would be more emblematic of a go-forward rate. If we were to deduct the portion of operating losses resulting from legal actions and customer remediation on account of regulatory penalties, the bank’s average efficiency ratio would have been 430 basis points better and annualized returns on tangible common equity would have already been 180 basis points higher over the preceding decade, notwithstanding the incremental compliance costs needed during this era, which should precipitously taper off as a percentage of net revenue. The unprecedented nature of the asset cap and magnitude of the regulatory penalties represented a more extreme bear case than could have reasonably been predicted in 2016, yet Wells still outearned its cost of equity in every year aside from 2020, which was the result of overly cautious provisioning charges taken amid the pandemic, on top of hefty regulatory fines. The inability of all the dynamics at play over the prior decade to prevent Wells Fargo from generating through-the-cycle returns on tangible common equity that materially exceeded its cost of equity gives us high conviction in the franchise to generate economic profits over the cycle in a future where it’s allowed to grow its balance sheet.

While identifying cost advantages and switching costs as the sources that underpin its moat, in adherence with our framework, we note that Wells Fargo, much like the other money-center banks, is composed of a significantly different business mix than the broader banking universe, which makes comparison across some more traditional metrics less of an apples-to-apples comparison. For example, one metric that we typically view as indicative of a cost advantage through the cycle is a lower efficiency ratio, or lower noninterest expenses as a percentage of net revenue, as it indicates that a bank can generate superior profitability per dollar of revenue than peers, often attributable to fractionalizing its fixed technology, branch operation, and compliance costs over a larger or denser base of assets. Due to the relative homogeneity of the traditional banking industry, particularly for smaller-scale operators that generate the lion’s share of revenue from net interest income, we believe that the efficiency ratio is a helpful metric when assembling the mosaic to identify structural cost advantages, yet the money-center banks do not quite fit the homogeneous mold. To illustrate the point, while wealth and asset management, investment banking, and institutional trading combine to comprise just 10.2% of net revenue, on average, for our regional banking coverage, these business lines combine to generate roughly 29.5% of net revenue for Wells Fargo. After controlling for business mix and one-time regulatory fines, we estimate that the efficiency ratio of Wells Fargo in 2023-25, if it exhibited the same mix of traditional banking, wealth and asset management, and investment banking and trading as the regional banks in our coverage, would have averaged 59.8%, edging the average of the moaty regional coverage. While this likely indicates an operational cost advantage today, it’s important to remember that the efficiency ratio has also been materially dampened by the impact of the asset cap on net interest margin.

We believe Wells Fargo occupies an attractive place in the landscape as the third-largest deposit base in the United States, roughly 81.4% larger than fourth-place Citi and more than double that of fifth-place US Bancorp. While not the most advantaged money-center bank holistically, Wells Fargo has a nuanced cost advantage over all the other money-center banks by carrying a significantly lower global systematically important bank, or GSIB, surcharge, allowing it to maintain a CET1 ratio that is 1.5%, 2.0%, and 3.0% basis points below Bank of America, Citi, and JP Morgan, respectively, which translates, by our estimates, to the generation of annualized returns on tangible common equity that are 1.7%, 2.4%, and 3.7% higher, all else equal. Further, the new Basel III re-proposal included a caveat that effectively removed the internal loss multiplier, a legacy formula that required Wells Fargo to maintain higher amounts of CET1 capital on account of the significant operational losses that occurred from 2016-22. By our estimates, if this went into effect prior to 2025, Wells Fargo would have generated a return on tangible common equity of 16.4%, nearly 180 basis points higher. Synthesizing the thoughts laid out above, we believe Wells Fargo occupies a wonderful niche by operating with more global insulation than the other money-center banks but with significantly more scale than even the largest regional banks, enabling material cost advantages over both groups. Further, we believe that the Basel III re-proposal, in combination with the removal of the asset cap and all consent orders, has created and released a coiled spring with ample ability to significantly improve its return profile.

While Wells Fargo segregates its operations into four distinct segments, we believe that strong synergies exist between the underlying business lines that comprise them, enabling the firm to monetize commercial and retail clients across its comprehensive suite of world-class products and service offerings at levels that materially exceed its banking industry competitors. We typically focus on superior funding costs and operating efficiency as the two levers that banks can pull to utilize cost advantages over competitors, and we believe that Wells Fargo has opted to pull both levers by fractionalizing the fixed costs of operating complementary business lines under one roof, while simultaneously leveraging the holistic strength of its ecosystem to attract low-cost deposits that, in turn, enable Wells Fargo to further bolster the strength of its ecosystem. Demonstrating this quantitatively, Wells Fargo exhibited a deposit beta—or the change in the yields paid to depositors relative to changes in the federal-funds rate—that was among the best in our banking coverage during the last rate-hiking cycle, which enables the maintenance of funding costs that are consistently among the strongest in our bank coverage. Further, the combination of funding cost advantages and diversified streams of fee income through a full ecosystem has enabled Wells Fargo to generate superior risk-adjusted revenue efficiency, evidenced by a preprovision net revenue, or PPNR, per risk-weighted asset, or RWA, profile similar to its money-center peers and significantly better than even moaty regionals. In effect, Wells Fargo has continued to contend favorably with the global behemoths despite regulators forcing it to fight with one arm tied behind its back.

Responsible for roughly 58% of consolidated deposits but only about 34% of loans, this segment functions as the primary engine for gathering low-cost retail deposits that fuel higher-yielding lending and securities investments across the enterprise. For consumer banks that have attained significant scale, competition for the prized “primary relationships,” where clients choose to house their primary transaction accounts and receive direct deposits, is significantly more predicated on service quality than pricing. We believe that even financially savvy retail clients mentally separate investing cash from operational cash, not too dissimilar from the behaviors we see with commercial clientele, with decisions regarding where to house operational cash being less driven by pure yield and more driven by factors like high-quality fraud prevention services, mobile app functionality, interconnection with the rest of the financial suite, and geographic proximity to branches and ATMs. This makes intuitive sense when considering that for the median transactional account balance (the sum of checking, savings, and money market account balances) in the United States of $8,000 (Federal Reserve Board's Survey of Consumer Finances), shopping around for an additional 50 basis points of collective yield equates to $40 annually, a gain that many simply do not feel compensates for the added time and complexity of managing accounts across multiple platforms, particularly if it raises the risk of events like insufficient funds in an account utilized for automated bill payments. Further, when distressing events like fraud occur, there is a premium that clients place on services like being able to access a client representative over the phone 24/7, access real humans at a nearby branch for resolution, and access to world-class detection systems. In quantifying the importance of these treasured primary relationships, we note that just 7% of US banking customers switched primary providers last year (BCG and the Consumer Bankers Association), implying a customer life of roughly 14 years, and for money-center peers Bank of America and JP Morgan, the retention rates of primary relationships are in the mid to high 90s. Given that one of the hallmarks of primary relationship customers is the insensitivity they show toward maximizing yield on transactional accounts, we believe that Wells Fargo’s low deposit beta during a rate hiking cycle likely indicates a primacy rate, or percentage of customers who are primary relationship customers, that is comparable to or better than the 80% and 92% rates that its money-center peers JP Morgan Chase and Bank of America report, respectively. In short, we believe that the ability to provide service quality high enough to garner a high percentage of customer relationships that exceed 15-20-plus years provides a strong competitive advantage for Wells Fargo, built on consumer switching costs, whether tangible or perceived.

In addition to reaping the benefits of its low-cost deposit franchise, we believe the cost advantages that large-scale banks like Wells Fargo enjoy become more pronounced as you move down the income statement. As mentioned earlier, Wells Fargo generated average efficiency ratios over the trailing three years better than our moaty regional banks after controlling just for regulatory fines and business mix, let alone factoring in the impacts of legacy risk-weighting formulas for operational losses, the asset cap, and second-order effects on yielding asset mix. Wells Fargo has been meticulous in optimizing the density of its branch footprint over time, using its scale and resources to take advantage of the nonlinear relationship that exists between branch market share and deposit market share within a metropolitan-statistical-area, or MSA. Typically, we see branch market share grow much faster than deposit market share in an MSA until hitting a critical threshold, oftentimes in the high-single-digit percentage range, after which point deposit growth looks more exponential than linear, culminating in positive operating leverage as deposit growth and subsequent revenue grow faster than the personnel and occupancy needed to service them. We believe Wells Fargo has been particularly adept at maintaining strong legacy positions in major markets with a more efficient branch fleet, while simultaneously expanding its presence in new markets to take share, resulting in a deposits-per-branch ratio of $349 million, which is 26% higher than the average in our bank coverage and materially higher than all but its money-center peers.

This segment is distinct from the corporate bank, which is primarily focused on serving the middle market, generally defined as companies with annual revenue between $10 million and $1 billion. We believe this business line benefits from a unique hub-and-spoke cost advantage, owing to the fractionalization of its technology over a vast clientele of roughly 60 million consumer and small-business customers and a $224 billion commercial loan book. The underlying digital infrastructure is shared across the CBL, commercial banking, and CIB segments, avoiding the pitfalls of redundant "siloed" spending that amortizes over smaller scales. For example, the cross-leveraging of Fargo, Wells Fargo’s artificial intelligence-powered virtual assistant, provides proactive insights to be used within Vantage, the bank’s digital platform for commercial clients. This multisegment application allows Wells Fargo to "fractionalize" the massive cost of training large language models, or LLMs, across every customer type. By utilizing the same predictive engine to solve a consumer’s debit card replacement query and a corporate treasurer’s foreign exchange post-trade inquiry, Wells Fargo significantly reduces the need for expensive human service agents across both divisions. Additionally, middle-market client agreements typically include earnings credit rates, allowing companies to “pay” for some of the banking service fees by maintaining noninterest-bearing deposit account balances above certain thresholds. These clients typically have less sophisticated treasury divisions, resulting in balances that exceed the fee offsets they receive. Further, smaller businesses have greater sensitivity to events such as a single lost contract or a 30-day delay in a major invoice, leading to generally higher cash balance buffers to maintain the “plumbing” of the business, thereby granting Wells Fargo access to additional sources of low- or zero-cost funding. These cost advantages enable the segment to generate average returns on tangible common equity that exceed its cost of equity by 450 basis points, excluding pro rata share of expense adjustments to the consolidated entity above.

Further, we believe that the commercial banking business enjoys strong switching costs across its middle-market-focused clientele. For middle-market companies, switching costs primarily stem from workflow lock-in and credit dependence. Most middle-market companies lack the payment frequency and IT budget to justify paying for a bank application programming interface, or API, and either rely on the bank’s proprietary web portal or a secure file transfer protocol, or SFTP, connection to batch-process daily payments from their enterprise resource planning, or ERP, system. In either case, switching banks means the company's entire accounting and treasury staff must relearn how to conduct its entire workflow (that is, initiate wires, manage users, pull reports, and so on), or undergo a costly, bespoke remapping of the company’s financial data fields and security protocols. Further, middle-market firms rely heavily on revolving credit facilities for working capital, leading banks to explicitly include covenants in these loan agreements requiring the company to keep its primary operating deposits at the bank. To switch cash management providers, the company often must refinance a significant portion of its debt structure, triggering prepayment penalties and legal fees. Additionally, on this point, most banks use data from clients' payment flows to underwrite loans, so if a client leaves for a competitor, the company loses the benefit of its data-backed credit history, which could result in higher borrowing costs or lower credit limits at a new institution.

To demonstrate the net effect of these switching costs, Wells Fargo boasts average commercial client relationships of 20 years, or an annual retention rate of 95%.

The bank’s corporate and investment banking, or CIB, segment delivers a suite of capital markets, banking, and financial products and services to corporate, commercial real estate, government, and institutional clients. This segment comprises a commercial bank serving larger corporate entities, an institutional trading business, and an investment banking business, which we view as tied at the hip.

For the commercial banking of large corporates, we see continued cost advantages arising due to the shared fractionalization of infrastructure costs, particularly relative to less-scaled regional operators, in addition to switching costs that arise from data degradation and the economics of platform consolidation. For large corporate clients, the switching costs shift toward data degradation and the economics of platform consolidation. Larger companies more typically utilize a third-party treasury management system, or TMS, as the front-end “glass” through which treasury teams view their workflows, powered by native API connections. Money-center banks like Wells Fargo experience minimal threat from smaller banks in poaching clients at this size due to the materially higher data fidelity it is able to provide with ISO-20022 native data architecture, when compared with regional peers that are reliant on middleware to translate messages for legacy-based core ledgers, resulting in significantly higher incidence of straight-through-processing for automated ERP reconciliation and lower incidence of expensive, manual reconciliation of messages that arrive with truncated data. The switching costs remain strong even for the hypothetical of a customer switching from one money-center provider to another because each bank uses a unique tagging nomenclature to refer to the same action type, which leads to elongated stretches of reconciliation “breakage” in ERP systems that were precisely tuned for the nomenclature of the legacy bank. Further, a single-bank ecosystem enables the use of sophisticated multicurrency notional pooling and intraday automated sweeping, allowing the treasury team to net global credit and debit positions in real time to eliminate expensive external borrowing costs and minimize idle, nonearning cash across disparate subsidiaries. In short, for large corporate clients that utilize third-party TMS and poly banking, the primary bank still enjoys strong switching costs associated with the operational complexity of switching providers and will offer higher ECR and interest yields to ensure higher account balances are maintained, leading to a continued retention of the bulk of the client’s wallet share.

We do not see institutional trading as a business that typically lends itself to a moat in isolation, as even world-class trading desks like Goldman Sachs have generated through-the-cycle returns roughly in line with their cost of capital, at least post-Dodd-Frank regulatory reform. This happens because market-making requires a broker-dealer to hold an inventory of financial instruments on its balance sheet to facilitate client transactions, in the absence of an offsetting transaction from another client. Thus, even the higher margins associated with more opaque areas of trading, such as bespoke derivatives or block trades, are typically eaten away over time by the increased capital required on the balance sheet to support these functions. That said, we view the institutional trading business as the price of admission to compete in investment banking, as distribution is functionally a requirement to lead capital raises, where we ultimately observe stronger monetization of these client relationships.

Moats in the conventional investment banking business are primarily derived from intangible assets, driven by the strength of a bank's brand or reputation, its relationships with investors, its expertise in particular geographies and industries, and its distribution capabilities. Wells Fargo operates from a unique place in the ecosystem as it finished eighth in the global league tables for investment banking revenue in 2025, despite having minimal international presence. Due to the capital-intensive nature of operating and growing a full-service trading operation, the asset cap strongly hindered Wells Fargo from investing in that business to the degree that bulge-bracket banks were able to. As such, Wells Fargo was able to maintain its investment banking presence by leveraging the strength of the commercial banking franchise, landing lead seats on debt capital raises and advisory for corporate actions undertaken by its clientele. Looking ahead to a future without balance sheet growth constriction, we believe that Wells Fargo will be able to materially increase the scale of its trading operation, largely to improve monetization potential of the deal flow it accesses through its corporate and commercial clients, yet we struggle to see Wells Fargo out-compete the bulge-bracket investment banks endowed with stronger distribution capabilities, as a result of larger trading operations, for complex mergers and acquisitions transactions and large IPOs, the most lucrative sub-categories of investment banking. We note that Wells Fargo has materially improved the reputation of its investment banking franchise after poaching roughly 100 senior bankers, including star dealmakers from Morgan Stanley, JP Morgan, and Credit Suisse, leading its advisory revenue to triple from 2024 to 2025 and its ascension in the global M&A league tables from spot 17 to 9. That said, we believe there is heightened uncertainty regarding the ceiling of this ascension and the conviction that we have in the CIB segment to continue materially outearning its cost of equity is derived from the cost advantages and switching costs present in the commercial banking franchise, coupled with additional monetization of these relationships through the investment bank.

Wells Fargo’s wealth and investment management, or WIM, segment provides personalized wealth management, brokerage, financial planning, lending, private banking, trust, and fiduciary products and services to affluent, high-net-worth, and ultra-high-net-worth clients. The second-order impacts of the regulatory penalties faced by Wells Fargo included simplifying business operations by focusing on the core banking franchise, ultimately leading to the sale of Allspring, its asset management business. This, combined with the temporary reputational harm that Wells Fargo experienced after the “Fake Accounts” scandal, culminated in negative net flows over the preceding seven years. Despite these headwinds, Wells Fargo still achieved an average return on tangible equity of 18.4% during this timeframe, even after accounting for the proportionate stake of the corporate/treasury segment.

Collectively, Wells Fargo has roughly $1.13 trillion in assets under management and another $1.38 trillion in client assets in brokerage accounts, making it one of the larger wealth management platforms, yet materially smaller than other wirehouse firms. Broadly speaking, we believe that wealth management is a structurally attractive industry that features dual-sided switching costs in advisor-client relationships. On the advisor side, switching costs manifest as platform switching leading to unplanned client attrition and retraining costs, both of which incentivize advisors to simply stay put. Cerulli Associates estimates that 19% of client assets do not follow advisors when they change firms, reducing the asset base on which revenue can be generated. From the client’s perspective, advisors build deep trust over time by navigating them through market volatility and major life events (retirement, divorce, business sales, family death/inheritance, and so on), fostering loyalty as they acquire and retain sensitive information about their clients over time that close friends and family may not even be aware of. Further, crafting financial plans that are highly customized to an individual’s or family’s needs, which often involves adjusting risk tolerances and the unique timing of cash flow needs, can make benchmarking returns a Gordian knot.

Despite the impressive scale of the wealth management operation and the industry's attractive economics, we ultimately see the WIM segment as a narrow-moat business due to the persistent difficulty it seems to face in raising net new asset flows for managed assets. Wells, alongside other money-center banks, has increasingly incorporated relationship-pricing models, which provide customers with combined account balances across the ecosystem that exceed various thresholds, offering benefits on other products, such as improved credit card rewards and lower mortgage rates. The cost savings associated with lower mortgage rates and better credit card rewards incentivize clients to consolidate assets at Wells Fargo, making the wealth management segment one of the biggest beneficiaries. While we do believe it has resulted in some level of inflows, we note that assets under management have experienced negative net new asset flows at a negative 2.0% rate, annualized. We believe this is likely the result of high levels of advisor attrition, particularly in advisors who have built a sufficiently large book of business and want to earn a higher take-rate by testing the waters in the fast-growing independent registered investment advisor, or RIA, channel. Lending further credence to this view has been the growth of an independent contractor channel, which we interpret as an attempt to lure advisors to improve their economics without Wells Fargo losing the entire revenue stream. Given that financial markets tend to grow over the long term, the attractive economics of wealth management operations beyond a certain scale are difficult to fully derail, so long as net asset flows do not stay negative to a magnitude greater than market appreciation. To demonstrate this, from 2018-22, Wells Fargo reported advisor productivity that improved $1,219,000 from $969,000 and returns on allocated capital, including pro-rata share of unallocated corporate treasury, improved to 19.7% from 16.6%, despite annualized net flows of negative 2.6% during this timeframe and 2022 being the year of returns that the 60/40 portfolio has posted since 1937.

Concluding our thoughts on the segment, while we do not anticipate Wells Fargo becoming a premier wealth management franchise that challenges its wirehouse peers or JP Morgan Chase, we simply struggle to envision the scenario, especially given the formation of the independent channel, that leads to net outflows amounting to a level where this segment does not generate returns on tangible common equity that materially exceed 9% over the cycle and believe a narrow moat is in order.

Putting it all together, we believe that Wells Fargo warrants a wide economic moat and built durable cost advantages resulting from operating at a unique position in the landscape that lends the operational advantages of scale, materially lower funding costs, and the ability to carry lower equity capital buffers than its money-center peers. Further, we note switching costs across all four segments, combined with a regulatory backdrop that is significantly more favorable than that experienced over the trailing decade, during which Wells Fargo still generated returns on tangible common equity that materially exceeded its cost of equity. The combination of these variables gives us confidence that Wells Fargo will continue to generate risk-adjusted economic profits for at least the next two decades and warrants a wide moat rating.

The new Basel III re-proposal lowers the risk-weighting for residential mortgage lending, which positions Wells Fargo to regain significant market share.

The resulting reputational enhancement after lifted consent orders and asset cap removal may enable advisor retention and net new asset growth in line with peers, enabling strong uplift to fee-based income.

Vantage adoption rates that surprise to the upside for commercial clients could lead to it becoming the default choice for middle-market treasurers, granting further access to operational cash and high-margin fee revenue.

The continued push toward Fargo for mass affluent clients could decrease migration toward traditional and more lucrative wealth advisors.

Increased proliferation of fintech platforms that pay higher yields on deposits could bring up funding costs for all banks even higher than we forecast.

A “hard landing” scenario for CRE office could lead to elevated net charge-offs as bridge loans mature over the next couple years.