Wednesday’s action on the stock market was fairly sedate, with stock market indexes like the S&P 500 index essentially moving sideways. That wasn’t the case with big American bank Wells Fargo (WFC 3.08%), as its shares bounced more than 3% higher. A piece of news about regulations was one reason for this, while an analyst’s price target raise also assisted in the lift.
Freeing capital
Late on Tuesday, Bloomberg reported that federal bank regulators are aiming to reduce a capital requirement for banks called the enhanced supplementary leverage ratio (eSLR). Large lenders like Wells Fargo are required to essentially hold a certain amount of capital to insulate themselves from economic shocks.
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Bloomberg, citing unidentified “people briefed on the discussions,” said that the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency are considering such a move. They are aiming to reduce the capital requirement of the SLR by up to 1.5 percentage points, to a range of 3.5% to 4.5%.
A lower requirement would free up more capital for banks to trade in Treasury securities, widely considered to be one of the safest investments on the market.
Price target raised
Separately, Raymond James analyst David Long upped his price target on Wells Fargo’s shares to $84 apiece from his preceding $78. In doing so, he maintained his strong buy recommendation.
According to reports, Long feels that the recent removal of the long-standing asset cap imposed on the bank by the Federal Reserve in 2018 will have a significant impact on its fundamentals. The bank is sure to grow its assets now that it’s free to do so; it should also benefit from higher securities trading and investment banking revenue.
While I’ve personally had some doubts about Wells Fargo’s conduct in the past — a key reason for the asset cap — I think it’s being more careful about its operations now. Assuming that impression is correct, I’d agree that it has much potential now that the asset cap has been lifted.
Wells Fargo is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
