Wells Fargo's Growth Stumbles Amid NII Pressures

What happened

Wells Fargo reported disappointing Q4 and full-year 2025 results, missing both revenue and net interest income consensus estimates despite earlier indications of strong underlying profitability. Prior analysis from the DeepValue report highlighted a BUY thesis based on robust capital levels post-asset-cap removal, regulatory easing, and fee income resilience offsetting NII headwinds. The latest results reveal higher deposit migration and tighter lending margins, which underperformed guidance and raise concerns about the bank's ability to navigate anticipated 2026 rate cuts. With shares trading at a high 1.67x price-to-book, reflecting aggressive capital returns, the valuation now appears stretched given the growth challenges and interest rate risks. This underperformance undermines the narrative of a smooth earnings recovery and re-rating potential, casting doubt on execution amidst ongoing efficiency initiatives.

Implication

The NII underperformance signals persistent deposit cost pressures and margin compression that could erode earnings if not offset by sustained fee growth from noninterest income. Valuation at 1.67x P/B leaves limited upside and heightens sensitivity to interest rate cuts, increasing downside risk if execution falters. Regulatory tailwinds like the asset-cap removal and expected SCB drops provide support, but may not fully counteract earnings headwinds without visible progress on cost efficiency and AI-driven productivity. Aggressive capital returns through buybacks could face constraints if NII weakness persists, potentially dampening shareholder value. Overall, the bank must demonstrate faster execution on its modernization and fee strategies to maintain investor confidence amidst a challenging macro environment.

Thesis delta

The long-term BUY thesis based on capital strength and regulatory easing remains intact, but near-term NII underperformance and elevated valuation have increased the risk profile. Execution on efficiency initiatives and fee income growth must accelerate to validate the re-rating potential; otherwise, the thesis weakens towards a HOLD stance as growth concerns overshadow structural improvements.