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Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS). Wells Fargo said this week that more layoffs are on the horizon for 2024, as the bank doubles down on efficiency and cost cuts. Elsewhere, Morgan Stanley’s asset management division raised over $1 billion for growth investing , The Wall Street Journal reported Thursday, in the latest sign its long-dormant deal-making business could start to show signs of life. At the same time, the banking industry is facing the prospect of fresh regulations that threaten to chip away at profits for both firms. Banks are wading through decades-high interest rates and higher funding costs as economic uncertainty grips the sector. The KBW Bank Index, which tracks the performance of the biggest U.S. bank stocks, is down 13.85% year-to-date, compared to the S & P 500 ‘s 19.91% gains since the start of 2023. While Jim Cramer recently described the sector as the laggard of the stock market, he maintains that the stocks of both firms are still a buy. With Morgan Stanley, in particular, Jim said shares should be purchased “aggressively” because of its great dividend yield and cheap valuation. Still, recent headlines shed light on how our financial names are pushing forward amid a tough operating environment. Cost cuts The news: During a Goldman Sachs conference Tuesday, Wells Fargo CEO Charlie Scharf warned of large severance costs for the bank’s fourth quarter. “We’re looking at something like $750 million to a little less than a billion dollars of severance in the fourth quarter that we weren’t anticipating, just because we want to continue to focus on efficiency,” Scharf said. He added that the firm needs to get even “more aggressive” on managing headcount and is “not even close” to where it should be on efficiency. Wells Fargo has already laid off more than 227,000 staffers — roughly 4.7% of its workforce — this year, as of September. The chief executive also noted that the bank wants to continue allocating funds to build out the money-making areas of its business like capital markets. The Club’s take: Although layoffs are never an easy decision, management’s focus on cost cutting is necessary to improve Wells Fargo’s efficiency ratio – a gauge of the bank’s expenses relative to its revenue. Wells Fargo’s efficiency ratio has consistently improved in recent years, helped by various initiatives like significantly scaling back its U.S. mortgage business . Overall, Wells Fargo is a multi-year play for the Club as the bank continues to show further progress around its turnaround plan, which was implemented after financial regulators imposed a $1.95 trillion asset cap on the bank back in 2018. However, we maintain that lifting the cap is a “when, not if” scenario — one that should increase the bank’s balance sheet, allowing the firm to rake in more profits. WFC YTD mountain Wells Fargo year-to-date performance. Fundraising The news: Morgan Stanley Investment Management has raised almost $1.2 billion in funding for late-stage growth investing, news that the bank confirmed after The Journal originally broke the story. The bank’s asset management arm closed two different private-equity vehicles, surpassing its fundraising goal by approximately 40%, the bank said. The Club’s take: Although the investment may seem like a drop in the bucket for one of the nation’s largest banks – it manages around $1.4 trillion in assets – the move signals a more positive trajectory for the broader fundraising environment. Raising capital has been significantly more difficult since the Federal Reserve began hiking interest rates in March 2022 and the blow up of SVB earlier this year, so any indication of a pick-up in investments could be beneficial for the overall deal-making environment. This would benefit Morgan Stanley’s languishing investment-banking business, which has slowed in recent quarters due to a muted initial-public-offering market and weak mergers-and-acquisitions activity. MS YTD mountain Morgan Stanley year-to-date performance. Regulation The news: On Wednesday, the heads of eight of the largest U.S. banks, including Wells Fargo and Morgan Stanley, tried to convince lawmakers that proposed regulations, known as the Basel 3 endgame, will hurt not only their firms but everyday Americans, too. During an annual senate oversight hearing, the CEOs pushed back on new proposed rules — designed for U.S. banks with at least $100 billion in assets — that would raise the level of capital firms must hold to mitigate against future risk. “The rule would have predictable and harmful outcomes to the economy, markets, business of all sizes and American households,” JPMorgan CEO Jamie Dimon said. The Club’s take: We’re optimistic that Wells Fargo and Morgan Stanley would be able to adapt to any new rules because both are well capitalized, as indicated in the Federal Reserve’s annual stress tests earlier this year. Although the Basel 3 endgame could hit net interest income for Morgan Stanley, any weakness should be offset by a more profitable investment-banking division. Additionally, Morgan Stanley’s outgoing CEO, James Gorman, told CNBC last month that the bank can handle “any form” of new rules regulators might implement. (Jim Cramer’s Charitable Trust is long WFC, MS . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.
Reuters
Wells Fargo (WFC) had to make some tough calls to stay on course with its turnaround plan. It’s one of three industry developments that impact Wells and our other bank name, Morgan Stanley (MS).
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