Morgan Stanley upgraded Wells Fargo from Equal Weight to Overweight and assigned a price target of $102. The firm believes that the balance sheet expansion pain Wells Fargo experienced after the asset cap was lifted is gradually easing, and the balance between future growth and profitability will improve, with both net interest margin and return on capital expected to rise again.

Morgan Stanley views 2026 as a transitional period for Wells Fargo. After the asset cap was removed, the company began re-expanding its balance sheet, but the initial expansion was more concentrated in lower-yielding Markets assets, while also requiring higher-cost funding to support growth, thereby placing significant pressure on net interest margin. This is also why Wells Fargo's stock performance has notably lagged this year.

Year-to-date, the stock has been one of the worst performers within Morgan Stanley's coverage universe, declining about 14%, while the median of its peer bank group rose roughly 7%. However, Morgan Stanley believes this pressure is approaching an inflection point. As the initial pace of balance sheet expansion gradually slows, the dilution effect of new assets on net interest margin will diminish. At the same time, the company can rely more on core deposit funding rather than high-cost financing, and revenue contributions from existing customer relationships are also expected to increase.

Morgan Stanley has already seen signs that net interest margin is beginning to stabilize. Recent management commentary indicates that actual net interest margin performance has been better than previously expected. The firm projects that Wells Fargo's net interest margin will hold at approximately 2.42% around the first quarter of 2027, then gradually recover to about 2.49% by the fourth quarter of 2027. This forecast already incorporates two further rate hikes.

In addition to slowing asset growth and higher core deposit contributions, more adequate netting of repurchase agreements could also serve as an additional source of net interest margin improvement. By reducing balance sheet usage and funding needs, such operations can further enhance funding efficiency.

What Morgan Stanley values more is the boost to overall profitability once net interest margin stabilizes. The firm expects that with revenue growth, improved funding costs, and continued operating leverage release, Wells Fargo's return on tangible common equity (ROTCE) will rise to approximately 17% in the second half of 2027 and further reach 18% in 2028. By comparison, Wells Fargo's current return on common equity is about 13%, implying significant room for profitability improvement over the next two years.

Morgan Stanley believes the current valuation does not fully reflect this change. Wells Fargo currently trades at roughly 1.5 times 2027 tangible book value, and if the company can raise ROTCE to 17% to 18% as expected, this valuation level remains low. Therefore, the core of this rating upgrade is not simply a bet on bank balance sheet expansion, but rather the view that the initial negative impact of expansion on net interest margin is diminishing, and Wells Fargo is beginning to move from "pursuing growth" to "converting growth into profit."

If net interest margin stabilizes, core deposit share increases, and operating leverage materializes simultaneously, Wells Fargo's earnings recovery over the next two years could exceed what the current stock price reflects, which is also the main reason Morgan Stanley upgraded it to Overweight with a $102 price target.