We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Wells Fargo & Company (NYSE:WFC) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A team of bankers in suits, discussing the success of the company’s banking products.
Wells Fargo & Company (NYSE:WFC)
Analysts’ Upside Potential: 12.62%
Having been established in 1852, Wells Fargo is currently the fourth-biggest bank in the United States. It operates in 35 countries worldwide, providing a wide range of financial services and products. Wells Fargo offers extensive financial education resources and personalized help from financial advisors.
Wells Fargo & Company (NYSE:WFC) reported second-quarter earnings of 2024 that exceeded average forecasts for both the top and bottom line. However, the company missed expectations on net interest income, a crucial metric for financial institutions, and it has declined every quarter since Q4 2022. Wells Fargo’s net interest income, which measures the difference between interest revenue received on loans and interest expenses, fell 9% YoY, and the bank now forecasts an 8-9% drop this year.
As part of the investor “bull thesis” heading into the quarter, higher net interest income was anticipated by analysts, therefore, the management’s revised guidance of NII is expected to put pressure on the stock, according to Citigroup analyst Keith Horowitz in a note.
Wells Fargo CEO Charlie Scharf stated that the US economy is strong owing to a healthy job market, but he warned of the risks associated with higher inflation and interest rates. While banks struggle with the repercussions from higher-for-longer interest rates as borrowers refuse to take out new loans, they are also forced to pay more to keep customers who are seeking higher yields.
However, the lender witnessed modest strength in investment banking and reported stable balance sheet quality, similar to what Bank of America (BAC) reported last quarter.
Wells Fargo has strengthened its trading and investment banking operations under Scharf, hiring a few senior executives from competitors. In the second quarter of 2024, Wells Fargo’s revenue from investment banking increased by 38% to $430 million YoY. Wells Fargo is nevertheless limited by a $1.95 trillion asset limitation and continuous regulatory oversight in spite of its expansion.
Wells Fargo & Company (NYSE:WFC) is one of the best financial services stocks to buy now since it has received a “buy” recommendation from 17 analysts. WFC has an average Wall Street analyst price target of $60.43, indicating an upside potential of 12.62% from the company’s current $53.66 price.
Overall WFC ranks 5th on our list of the best financial services stocks to buy. While we acknowledge the potential of WFC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WFC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
