Wells Fargo gets a double upgrade as Raymond James analyst sees positive catalysts ‘finally on the horizon’

Long raised his rating on the stock to outperform, after being at underperform since December, and at market perform before that. He initiated his stock price target at $32, which was 12.3% above current prices, after not having a target before.

The stock WFC, +8.78% rallied 8.4% in afternoon trading, putting it on track to close at the highest price since June 16. The rally paced all 88 of the components of the SPDR S&P Bank exchange-traded fund KBE, +4.85% that were gaining ground Tuesday. The bank ETF rallied 4.5%.

Long said he double-upgraded Wells Fargo as the effects of the account-opening scandal, which has pressured revenue and elevated expenses since it broke more than four years ago, begin to rescind.

“With the worst likely in the past, we now believe that its pretax pre-provision income has troughed, revenue is nearing a bottom, a multi-year expense rationalization initiative can finally be taken on and repurchase activity can return in the near future,” Long wrote in a research note to clients.

Also read: New Wells Fargo CEO says bank’s issues won’t be fixed until 2021.

The bank reported last month third-quarter revenue that beat Wall Street expectations, breaking a three-quarter streak of misses, while the bottom-line has missed forecasts for five straight quarters.

As investor interest in banks increases, Long said he believes Wells Fargo’s stock “will stand out,” given its discounted valuation to peers. He said Wells’ stock traded at about 82% of tangible book value (TBV) through Monday, while J.P. Morgan Chase & Co.’s stock JPM, +4.62% traded at 184% of TBV and Bank of America Corp. shares BAC, +5.80% traded at 135% of TBV.

Wells’ stock has tumbled 47.0% year to date, while J.P. Morgan shares have lost 12.4% and Bank of America shares have declined 18.9%. Meanwhile, the bank ETF has fallen 13.4% this year and the S&P 500 index SPX, +1.61% has rallied 12.5%.

“As regulatory pressures gradually ease, we expect the bank to embark on a material long-term expense rationalization initiative in order to bring its efficiency more in line with that of its peers,” Long wrote. “We believe its new CFO and his team are reviewing the bank’s current expense base and are targeting cost savings goals for 2021, which we hope to hear more about on its January conference call.”

Mike Santomassimo was named chief financial officer in July, to replace John Shrewsberry, who retired.

Wells Fargo is projected to report fourth-quarter results on or about Jan. 15.