This year’s stock sell-off hasn’t spared banks, with the KBW Bank Index down more than 20%, roughly in line with the decline of the broader S & P 500. Shares of big American banks have dropped despite rising interest rates, which help them boost the profitability of their core lending activities. That’s because investors are now concerned that a recession is on the horizon, which would lead to rising defaults as borrowers struggle to repay loans. Given that setting, Bank of America analysts led by Ebrahim Poonawala reviewed the bull case for what had been the top pick among several analysts coming into 2022 to see if it holds up at midyear. Of the six factors tracked by the researchers, four were positive or steady at Wells Fargo , the analysts said Thursday in a research note. Only two were negative: Fee revenue from the bank’s mortgage division is down sharply, and share buybacks have tapered off as the firm conserves capital. Wells Fargo’s ability to pull the lever of lower expenses is perhaps the best among the big U.S. banks, according to the analysts. This week, the bank’s CFO reiterated a previous $51.5 billion target on that front. Wells Fargo can afford to drag its feet on raising interest rates for depositors, and the credit quality of its loan book is holding steady, with little reason to add to reserves in the near term, according to Bank of America. Most importantly, the company’s path to a 15% return on tangible common equity is “intact” and could happen as early as late 2022, thanks to the Federal Reserve’s aggressive rate hikes . Those factors, along with a valuation improved by the bank’s 20% stock decline this year before Thursday, help make Wells Fargo “one of the most compelling risk/reward” picks among big U.S. lenders, according to Poonawala. More broadly, the banking sector as a whole should hold up better in the coming potential recession than in 2008, because regulators have forced the companies to hold twice as much capital as before and endure annual stress tests. — CNBC’s Michael Bloom contributed to this story
