Wells Fargo, Big Banks Get a Lift From the Federal Reserve

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Banks are shouldering much of the credit risk in the economy right now. But the latest development could be a positive for the rallying bank stocks. Wells Fargo is specifically in focus. 

The Federal Reserve said Wednesday morning that it is loosening lending standards specifically for Well Fargo’s  (WFC) - Get Report small business and household lending programs for those who are sifting a liquidity crisis amid the Coronavirus pandemic. 

Wells Fargo shares rose is much as 3.5% Wednesday. Peers Bank of America  (BAC) - Get Report and JPMorgan  (JPM) - Get Report saw their share prices rise 4% and 2.65% as well. 

Positive signs on the spread curve of the coronavirus in China and New York is lifting sentiment on cyclicals like banks, who lend more when the economy grows. Plus, the rise in loner-dated treasury bond yields is a major positive for banks’ net interest margins. The 10 year treasury yield is up to 0.75%. 

The Fed said it will not count Wells Fargo’s small business and household loans — they’re part of the Fed’s broader stimulus program — towards the company’s cap on the size of its balance sheet. This is a positive for loan volumes for Wells Fargo. 

"The change today provides additional support to small businesses hurt by the economic effects of the coronavirus by allowing activities from the PPP and the Main Street Lending Program to not count against the cap,” the Fed said in a statement. The PPP is the  Paycheck Protection Program. 

The may be one reason for the risk on sentiment in the broader market Wednesday, as businesses and people gain greater access to capital, as liquidity dries up. 

For banks in general, the move indicates the Fed is willing to loosen standards during this crucial period for an economy likely in the beginning of a recession. 

Still, there is a risk that the Fed’s program potentially worsens. 

Banks could see 2020 earnings per share fall 40% from initial expectations because of credit losses, Goldman Sachs analyst Richard Ramsden wrote in a note. He said higher year-over-year loan volumes won’t be nearly enough to offset this headwind. He also sees 2021 and 2022 EPS results falling 16% and 10%, respectively. But Wells Fargo shares are indeed already down 45% on the year. 

Other bank stocks haven’t reflected the full extent of Ramsden’s broader banking sector estimates. JPMorgan, for example, is down 34% year-to-date. 

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