One Wall Street bank could win big from the Fed lift-off

The winds are changing on Wall Street, and Wells Fargo could be the biggest beneficiary.

That’s according to a note from Goldman Sachs analyst Richard Ramsden, who the bank is well-positioned for continued interest rate hikes from the Federal Reserve.

Ramsden upgraded Wells to “buy.”

It is all to due with the make-up of Wells Fargo’s deposit base.

Ramsden writes that, as the Fed continues hiking interest rates this year, “retail, small balance deposit bases” will see the least pricing pressure.

In other words, smaller depositors are less likely to go shopping for better terms elsewhere. That means there is likely to be less pressure on banks to offer better terms, and therefore a higher net interest margin, which marks the difference between interest income and interest paid out.

“This bodes well for WFC, as their average deposit balances appear low and a sizeable share of their deposits are to consumers,” Ramsden said.

The analysts anticipate a 3% upside to earnings for Wells Fargo during the first 100 bp rate increase — that is, likely until mid or late 2017.

Worst-case scenario

Even in a challenging environment, Wells is still among the best-positioned banks on the Street.

“If we get an environment where oil prices grind lower, China slows, and rates stay flat, we see the least downside to WFC’s ’16E EPS,” Ramsden writes. He would anticipate a -6% change to earnings, versus a -13% change for other major banks.

What if there’s an emerging merging market slowdown? “Only 2% of [Wells’] loans are to emerging markets,” Ramsden notes.

And in the event of energy prices dropping even lower? “Energy loans are only 2% of Wells’ book, implying a 2-3% EPS impact.”

Ramsden points to Wells’ ability to grow earnings per share “inorganically,” referring to its purchase of General Electric’s financial assets in 2015, which could set it apart from the competition in a lower-growth environment.

He also points to Wells’ dividend growth, and the Federal Reserves’ changing regulations for global systematically important banks, for which Wells is also better-positioned than the competition.

“WFC looks likely to outperform if the environment stays tough,” Ramsden writes.

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