Justin Sullivan
Keefe, Bruyette & Woods downgraded Wells Fargo (NYSE:WFC) to Market Perform from Outperform after the stock outperformed the KBW Nasdaq Bank Index (BKX) by 48% since the summer of 2021. Furthermore, the stock has outperformed by 10% year-to-date on renewed investor enthusiasm that the Fed's asset cap on the bank will be lifted.
"Although we share this enthusiasm, we believe the stock is set for a consolidation phase given expectations for NII (net interest income) to underperform peers and trough in 1H25," KBW analyst David Konrad wrote in a note to clients.
He points to three near-term headwinds for the stock: limited upside after discounting improved returns/valuation in 2027; risk that the asset cap is not removed near term; and KBW expects WFC's NII to underperform peers during the next six quarters due to its asset-sensitive balance sheet and outperformance of deposit betas during rising rates.
With Konrad expecting the Federal Reserve to lift its asset cap on Wells Fargo (WFC) in late 2025, returns should improve in 2027. His model has the bank's assets exceeding the Fed's cap of $1.95T by Q4 2025 and assumes that growth in bonds, cards, and corporate loans will push assets to near $2T by Q4 2027.
Meanwhile, stock buybacks should provide support for shares, the analyst said. "With a CET1 ratio of 11.4%, WFC is in a strong position for continued buybacks," Konrad said. "We are forecasting a CET1 ratio of 9.8% in 2027, which results in a total payout ratio of 93% in 2026 and 105% in 2027, or $13.2B and $17.5B in buybacks," compared with $11.9B in buybacks in 2023.
KBW's Market Perform rating contrasts with the SA Quant rating of Strong Buy and the average SA Analyst rating and average Wall Street rating, both at Buy.