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The asset cap that Wells Fargo has worked for for seven years – finally lifted on Tuesday – is one of the strangest and harshest penalties, and encountering fraudulent financial institutions. The bank was banned by the Federal Reserve in 2018 from expanding assets above $20, due to widening its customers. The cap was temporary. That’s not the effect.
After multiple scandals defeated two predecessors, Charlie Schaaf, who took over as chief executive in 2019, fought at Wells Fargo through a bush of consent orders, lawsuits and investigations. Meanwhile, the rivals made hay. Bank of America and JPMorgan have increased their own balance sheets by 50% and 70% in round numbers, respectively.
That means a mountain of profits that Wells Fargo missed. If Scharf’s banks were grown as fast as Bank of America’s, their balance sheet today is over $900 million. With its current asset return of 1%, Wells Fargo is increasing its annual revenue of $9 billion. It is a multiple of revenue from current prices, which is 13 multiples, and its asset cap is valuing its as a market cap of nearly $120 billion on banks.
What now? Probably an expansion. But it’s not clear that there are a lot of them. The demand for loans is at best modest. Analyst expects the median value of large listed US banks to grow by just 2.5% this year, according to Visible Alpha. Rivals are gaining growth primarily from credit cards and loans to wealthy clients. Neither are large companies in Wells Fargo, a historically rather traditional retail bank today.
Investment banks (merger and underwriting advice) are one of the places where Wells Fargo certainly could grow. Under Scharf, after being the JPMorgan banker himself, expenses grew wisely from $1.8 billion in 2017 to $2.7 billion last year. It’s less than a third of what JPMorgan creates, but it’s the start.
The most painful part of Wells Fargo’s era under the dance cap must have seen the fate of other Wall Street Giants Mints from the trade. JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley have been garnering trade profits for $700 million since 2018, but Scharf and his bankers have looked stunningly from afar.
Wells Fargo is now able to enter the business with more joy, for example by offering short-term credit to institutional investors. There are other opportunities too. Costs bloated due to cleaning efforts should decrease as a share of revenue. Scharf may consider acquiring it from 2,000 US banks and countless fintechs. But the chance to catch up with JP Morgan, who is always a long shot, is probably forever gone.
On the other hand, misconduct remains a fact of life. The five largest US banks, except Wells Fargo, have paid more than $14 billion in fines and fines over the past seven years, according to the Good Jobs First Viloration Tracker for crimes such as discriminatory lending, unfair fees, money laundering and market rigging. Lesson: The asset cap is very painful, there are very few fines. It’s probably time to consider something in the middle.
john.foley@ft.com
