Wells Fargo considering use of balance sheet for direct lending: WSJ

Wells Fargo considering use of balance sheet for direct lending: WSJ

Wells Fargo has been cleared to grow its balance sheet for the first time in seven years, following the Federal Reserve's removal of a $1.95 trillion asset cap [1]. The decision, which comes after years of compliance efforts and leadership changes, marks a significant milestone in the bank's recovery from its fake accounts scandal and broader risk-management failures.

The Federal Reserve's move allows Wells Fargo to expand lending, increase deposits, and pursue acquisitions without regulatory constraints. The bank, under the leadership of CEO Charlie Scharf, has made "substantial progress" in governance and risk management, as verified by an independent third-party review [1].

The removal of the asset cap is seen as a potential catalyst for Wells Fargo, enabling the bank to regain lost deposit market share and fund growth across various business sectors. Goldman Sachs analysts have reaffirmed their Buy rating for Wells Fargo stock, maintaining a price target of $76.00 [2]. The analysts estimate that Wells Fargo could experience a 14-19% increase in earnings per share, translating to a return on tangible common equity (ROTCE) uplift of approximately 200-280 basis points.

With the asset cap lifted, Wells Fargo is considering the use of its balance sheet for direct lending. This strategy could help the bank expand its market presence and generate additional revenue streams. Direct lending involves providing loans to companies, often in the middle market, which may not have access to traditional financing options. By leveraging its balance sheet, Wells Fargo can offer competitive lending terms and capture a larger share of the market.

However, Wells Fargo still faces other Fed-imposed consent orders stemming from additional scandals, including the improper charging of mortgage fees and forcing unnecessary auto insurance on borrowers. The bank has resolved more than a dozen consent orders since 2019 and continues to work through remaining issues.

In conclusion, the removal of the asset cap provides Wells Fargo with fresh capital allocation flexibility and reputational relief. The bank is now positioned to expand its balance sheet and explore new growth opportunities, including direct lending. As the bank continues to address its regulatory issues and strengthen its compliance and governance standards, investors and financial professionals should closely monitor Wells Fargo's progress and strategic moves.

References:
[1] https://www.btimesonline.com/articles/174609/20250604/wells-fargo-cleared-for-growth-as-fed-lifts-1-95-trillion-asset-cap-after-seven-year-scandal-clampdown.htm
[2] https://www.investing.com/news/analyst-ratings/goldman-sachs-maintains-buy-rating-on-wells-fargo-stock-93CH-4079877