Trump's Triumph: A Path to Wells Fargo's Asset Cap Removal

The 2024 U.S. presidential election has come to a close, with former President Donald Trump securing a decisive victory. As the dust settles, investors are turning their attention to the potential implications of a Trump administration on various sectors, including banking. One significant development that could emerge from Trump's win is the potential removal of Wells Fargo's asset cap, which has hindered the bank's growth and profitability for nearly seven years.

The Federal Reserve imposed the asset cap on Wells Fargo in 2018 as a consequence of the bank's past misconduct, limiting its total assets to around $1.95 trillion. This cap has cost Wells Fargo billions in lost profits, with Bloomberg estimating $4 billion in 2020 alone. The bank has made significant progress in addressing its consent orders and improving its operational and risk management practices. However, the asset cap's removal has remained elusive, despite the bank's efforts.

A Trump administration, known for its pro-business stance, could potentially expedite the removal of Wells Fargo's asset cap. The Federal Reserve's board composition could shift under Trump, with the president having opportunities to replace Fed governors. This could lead to a more bank-friendly makeup, potentially influencing the Fed's decision on the asset cap. Additionally, a Trump administration might adopt a more lenient regulatory approach, which could accelerate the removal of the asset cap.

Wells Fargo has taken several steps to address the Fed's concerns and improve its operational and risk management practices. The bank has submitted plans to enhance its operational and risk management program, governance, and oversight, which reportedly spanned thousands of pages. Wells Fargo has also exited certain businesses to focus on its core U.S. franchise, ramped up higher-returning businesses like credit cards and capital-light businesses like investment banking, and made significant progress on its consent orders.

Market sentiment has already reflected optimism about the potential removal of the asset cap under a Trump administration. Wells Fargo's stock has rallied almost 14% since the election, a significant move for a large bank stock. This surge suggests that investors anticipate a friendlier regulatory environment, potentially leading to the removal of the Fed's asset cap.

However, it is essential to note that the asset cap removal is not guaranteed, and Wells Fargo still faces potential challenges. The initial enforcement action allows for extra reviews post-third-party submission, and the Fed could require additional checks. Moreover, the asset cap's removal timeline remains uncertain, with the market expecting it by next year or early 2026.

In conclusion, a Trump administration could pave the way for Wells Fargo to shed its asset cap, which has cost the bank billions in profits. The Fed's board composition could shift under Trump, potentially influencing the asset cap decision. Wells Fargo has made significant progress in addressing its consent orders and improving its operational and risk management practices. Market sentiment has already reflected optimism about the potential removal of the asset cap under a Trump administration. However, it is crucial to remain cautious, as the asset cap removal is not guaranteed, and Wells Fargo still faces potential challenges.