Wells Fargo & Co

Wells Fargo reported serviceable third-quarter results, with net revenue and earnings per share growth of 2% and 8%, respectively, from a year ago, though a lack of any positive revisions in net interest income and expense guidance in 2026 weighed on investors' minds, sending shares down 3%.

Why it matters: Unshackled from the asset cap, Wells Fargo was primed to thrive over the trailing year as it recaptured some lost deposit market share and deployed freed-up regulatory capital towards growing its balance sheet, though its allocation has puzzled investors in this environment. Wielding one of the strongest franchises across retail and middle-market clients, we've been pleased to see the firm pick up where it left off as a deposit gatherer, as another quarter of sequential growth brought average deposits up 11.4% since the asset cap was lifted in the second quarter of 2025. Wells Fargo has prioritized the growth of its institutional trading desk, a capital-intensive business that earns narrower spreads than traditional banking, compressing its net interest margin by 18 basis points over the trailing year to 2.43%, and yet, markets revenue declined 1% from a year ago while larger peers experienced material growth.

The bottom line: After digesting results, we are lowering our fair value estimate for wide-moat Wells Fargo to $92 from $93, as our revised forecasts incorporate lower near-term trading revenues and higher deposit costs. We view shares as undervalued and believe the recent sell-off presents investors with a buying opportunity. Though Wells Fargo has fallen a bit short of expectations in an attractive banking backdrop, we view the recent sell-off as overblown and see Wells Fargo poised to ride the tailwinds of a higher-interest-rate environment. With deposit costs of 1.51%, among the lowest in banking, we see greener pastures ahead.

Opining further on the firm's attempted transformation into a more traditional money-center bank, we view institutional trading as a relatively unattractive business, in isolation, where the central argument revolves around deepening client relationships that are monetized in other areas of the bank, namely investment banking, commercial banking, and asset management. As a top-heavy industry where global reach is paramount, we struggle to see a world where Wells Fargo captures meaningful share from larger incumbents to justify continued prioritization.

That said, we believe Wells Fargo has forged a particularly attractive position in the landscape: one of the four largest commercial footprints, despite running a considerably smaller trading operation, which we believe offers meaningful upside as the firm eventually reprioritizes its core competencies to improve its return profile. Equipped with all the tools to return to its former glory before the implementation of the asset cap, we believe the firm will take advantage of strong loan demand, benign credit, and elevated interest rates going into 2027.

We are lowering our fair value estimate for Wells Fargo to $92 per share, from $93, as our revised forecasts now call for lower trading revenue and modestly higher deposit costs. Our fair value estimate translates to a price/earnings multiple of 12.9 times and 12.1 times our estimates for 2026 and 2027, respectively. Additionally, our fair value estimate equates to a price-to-tangible book value of 2.1 times our forecast 2026 tangible book value.

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.

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 5.6%, driven exclusively by market appreciation, as we forecast average net new asset flows to be negative over the next decade and modest fee compression, culminating in investment advisory revenue growth of 4.7%.

Turning to lending and deposit-related fees, we forecast growth at an annualized rate of 4.7% 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 segment, we believe investment banking revenue should hold up relatively well given the improved external environment, married with Wells Fargo’s deep network of corporate client relationships that yield consistent deal flow. To that end, we believe 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. Despite significant capital deployment toward scaling 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 incumbents, 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 1.9% over the next decade.

On the balance sheet, we view Wells Fargo as well positioned to ride the tailwinds of a higher-rate environment in the near term, expecting net interest income to grow 3.7% and 8.4% in 2026 and 2027, respectively. We forecast a rate-cutting cycle to begin in 2028, which poses headwinds to the asset-sensitive bank, though we still expect net interest income to grow 0.8% in 2028 as balance sheet growth offsets yield compression.

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 1.9% 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 59.5% 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 assign Wells Fargo a Morningstar Economic Moat Rating of wide, based on durable cost advantages and switching costs across its consumer, commercial, and corporate & investment banking franchises, alongside switching costs in wealth management. Average returns on tangible common equity, or ROTCE, of 12.3%, relative to our 8.9% estimate cost of equity, over the past decade corroborate our view, despite being weighed down by the industry's first-ever asset cap, which barred Wells Fargo from growing its balance sheet above $1.95 trillion from 2018 until the restriction was lifted in mid-2025. We estimate the cap cost roughly $394 billion of foregone deposit growth and suppressed 2025 net income by about one-third, a drag that will fade as the balance sheet reaccelerates. As a result, we forecast average ROTCE expanding to 15.0% over the next decade.

Wells Fargo exercises cost advantages via both funding costs and operating efficiency. The firm’s funding cost advantage is exhibited by a deposit beta among the best in our coverage during the last rate-hiking cycle. Business mix makes traditional efficiency-ratio comparisons imperfect, as wealth management, investment banking, and institutional trading generate 29.5% of net revenue, versus 10.2% for our regional coverage, but after controlling for mix and one-time regulatory fines, we estimate the 2023-25 efficiency ratio would have averaged 59.8%, edging our moaty regional average. Further, Wells Fargo carries a meaningfully lower GSIB surcharge than money-center banks, translating to common equity Tier 1 requirements 1.5 to 3.0 percentage points lower than Bank of America, Citigroup, and JP Morgan, with a net result of 170 to 370 basis points of incremental ROTCE.

The consumer banking and lending segment gathers roughly 58% of consolidated deposits, versus 34% of loans, funding higher-yielding lending and securities elsewhere in the franchise. Competition for primary banking relationships is driven more by service quality—fraud prevention, app functionality, branch/ATM proximity—than by yield, and Wells Fargo's low deposit beta through the last rate-hiking cycle implies a primacy rate comparable to or better than the 80% and 92% rates reported by money-center peers JPMorgan and Bank of America, respectively. Wells Fargo has been meticulous about branch density: market share within a metro area typically moves roughly in tandem with deposit share until a high-single-digit threshold, after which deposit growth turns exponential relative to branch growth, driving positive operating leverage, and the firm's $349 million in deposits per branch, 26% above our coverage average, reflects this dynamic. On switching costs, just 7% of US banking customers switch primary providers annually, implying a roughly 14-year customer life industrywide, with money-center peer retention rates in the mid- to high-90s—dynamics we believe extend to Wells Fargo given its comparable primacy positioning.

The wealth and investment management segment holds $1.13 trillion in assets under management and $1.38 trillion in brokerage client assets. Wealth management carries structural, dual-sided switching costs: advisors are reluctant to move because roughly 19% of client assets don't follow them to a new firm (Cerulli Associates), while clients build deep, trust-based relationships with advisors who guide them through market volatility and major life events—retirement, divorce, a business sale, an inheritance—and craft personalized plans around bespoke risk and income needs that make advisor performance particularly difficult to benchmark. Relationship pricing across the consolidated platform helps offset a structural headwind: net new asset flows have averaged a negative 2.0% annually amid elevated advisor attrition toward the independent registered independent advisor, or RIA, channel, a dynamic we believe will persist, yet the segment still generated an 18.4% ROTCE over the trailing seven years.

The commercial banking and corporate & investment banking segments pair a hub-and-spoke middle-market franchise with a top-10 investment bank now rebuilding post-asset-cap scale, with commercial relationships feeding investment banking deal flow. Cost advantages stem from shared digital infrastructure fractionalized across roughly 60 million consumer and small-business customers and a $224 billion commercial loan book, including a shared AI platform (Fargo), enabling the commercial segment to generate ROTCE that exceeds its cost of equity by 450 basis points. Switching costs differ by client size, with middle-market clients facing workflow lock-in from proprietary portals or data feeds embedded in treasury operations and loss of a data-backed credit history if they leave, while large corporates face data degradation from bank-specific reconciliation nomenclature and lose the benefits of multicurrency notional pooling and intraday sweeping that only a single-bank ecosystem can provide. Altogether, the firm boasts average commercial relationships of 20 years, or effectively a 95% annual retention rate. The institutional trading business is not moatworthy in isolation, but it provides product and service options that bolster the commercial and investment banking franchises. Acknowledging the synergies of the business lines, the firm poached over 100 senior bankers in preparation for growing the trading desk following the official lifting of the asset cap, enabling ascension to eighth in the global league tables.

Taken together, we view Wells Fargo as a wide-moat franchise with durable cost advantages from lower funding costs, a lighter GSIB surcharge, and fractionalized fixed costs, and switching costs across its consumer, commercial, and wealth management segments. The consolidated ecosystem, now unshackled from the asset cap, positions the firm to convert a decade of suppressed returns into a multiyear acceleration toward our 14.6% forecast ROTCE.

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.