Morgan Stanley upgraded Wells Fargo to a buy-equivalent rating from hold on Monday and named it a top pick, pointing to easing funding pressure and a stronger investment-banking push ahead of next Tuesday's earnings. The firm's $102 price target implies about 27% upside from Friday's close.
Morgan Stanley upgraded Wells Fargo to a buy-equivalent rating from hold on Monday, naming the bank a top pick just over a week before it reports earnings next Tuesday. The firm's $102 price target implies about 27% upside from Friday's close and sits roughly $6 above the stock's record close in early January.
Shares rose about 1.5% Monday but remain down about 12% this year. By comparison, BNY has surged 24%, Citi has gained nearly 11% and Goldman Sachs is up roughly 2%, while the Invesco KBW Bank ETF is up about 4%. The timing stood out: Morgan Stanley bet that some of the pressures behind Wells' underperformance are already easing, rather than waiting for next week's results. According to CNBC: "It was a very big call", Jim Cramer said of the move.
Asset cap removal reshaped the balance sheet
Morgan Stanley sees 2026 as a transition year following the removal of the Federal Reserve's $1.95 trillion asset cap last June, which had restricted Wells' balance-sheet growth for more than seven years. Freed from that limit, Wells ended June with $2.23 trillion in assets, up 15% year over year.
That growth initially relied on more expensive borrowing to fund lower-yielding assets, which squeezed net interest margin. Now that the initial burst of balance-sheet growth is slowing, Morgan Stanley expects Wells to need less of that costlier funding and rely more on lower-cost customer deposits. The firm projects net interest margin to stabilize around 2.42% through the first quarter of 2027 before expanding to 2.49% by the fourth quarter. CFO Mike Santomassimo said at a Sept. 15 conference that the bank's third-quarter net interest margin was running ahead of expectations.
Investment banking push gains traction
Beyond margins, Morgan Stanley pointed to fee income as a growth lever, since Wells can earn more from relationships where it already commits capital, particularly through investment banking. The bank has hired roughly 150 senior bankers over the past four years and more than doubled investment banking fees from 2022 levels, gaining share in M&A and equity capital markets. Still, those fees remain well below peers relative to the size of Wells' commercial loan book, and analysts estimate narrowing that gap could eventually generate roughly $4 billion in additional annual fees. The bank is not in Dealogic's top 10 global M&A advisor rankings this year, a list Goldman Sachs leads, holding onto the top spot it secured in 2025.
Profitability targets underpin the upside case
Morgan Stanley expects Wells' return on tangible common equity to rise from 15.5% in 2026 to 17% in the second half of 2027 and 18% in 2028, arguing the stock doesn't yet reflect that improving profitability. Shares trade at less than 11 times forward earnings, according to FactSet, down from a 13 multiple at the start of the year. If next Tuesday's results show net interest margin stabilizing alongside continued progress in investment banking, Wells could finally get credit for the profitability case Morgan Stanley is now making.
Source: CNBC
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