By Emily Glazer
Wells Fargo & Co., the largest bank in the U.S. by market
value, has been rewarded for keeping its business simple. Now it is
slowly creeping into more complex--and riskier--territory.
While many rivals retreat from risk amid regulatory pressures,
the bank is expanding into a range of businesses a step removed
from its long history as a Main Street lender. Among the
initiatives: ramping up its investment-banking unit, bolstering
trading assets and building up some overseas offices.
Last year, Wells Fargo reported $1.71 billion in fees from
investment banking, up 77% from 2010, according to data provider
SNL Financial. Wells Fargo's investment bank will get a boost when
the lender closes its deal with Blackstone Group LP and others to
buy a $26.5 billion portfolio of office buildings and commercial
real-estate debt from General Electric Co. Wells Fargo bankers
advised on the deal, which was announced Friday.
New frontiers offer the prospect of higher growth, given that
Wells Fargo is already No. 1 in U.S. mortgage banking and a big
player in retail banking. But forays further afield are tricky for
the 163-year-old San Francisco bank, which has historically avoided
Wall Street businesses.
Investors have applauded its conservative approach: Its shares
have grown nearly 70% over the past five years, more than 30
percentage points more than its closest big-bank peer, J.P. Morgan
Chase & Co.
As any bank including Wells Fargo "gets more complex, it always
makes investors more nervous," said Paul Condrat, a portfolio
manager at Great Falls, Mont.-based Davidson Investment Advisors,
which owns nearly 300,000 Wells Fargo shares. "We really need to
see how well they're managing through it when times get a little
bit tougher."
It isn't just investor perception at stake. Big banks that are
more complex such as J.P. Morgan and Citigroup Inc. may be required
by regulators to set aside more capital to guard against recessions
or deep losses. That would depress their profitability versus
simpler lenders like Wells Fargo.
So far, Wells Fargo's push into investment banking hasn't caused
problems with regulators, in part because it is still small in the
area relative to the other five big banks. For 2014, Wells Fargo
had $1.83 billion in U.S. investment-banking fees, ninth after
leaders J.P. Morgan with $4.17 billion, Bank of America Corp. with
$3.71 billion and Goldman Sachs Group Inc. with $3.12 billion,
according to data provider Dealogic.
Wells Fargo's moves show it has the latitude to push into
businesses that other banks have de-emphasized due to tougher
regulations and past mistakes. In the past several months,
Citigroup has said it plans to exit consumer operations in more
than 10 countries overseas, J.P. Morgan sold its commodities unit
and Morgan Stanley moved to sell several commodities
businesses.
This year, Wells Fargo has collected 5.2% of all U.S.
investment-bank revenue, which include advising companies on
selling shares, bonds and mergers and acquisitions. That is more
than Wall Street fixtures such as Credit Suisse Group AG and
Deutsche Bank AG. Wells Fargo's share of the investment-banking pie
is now the seventh-biggest among banks tracked by Dealogic, up from
ninth in 2014.
"In five years, they're going to be a major investment bank, at
least in the United States," said J.P. Morgan Chairman and CEO
James Dimon in February 2014.
How big an investment bank Wells Fargo should have is a subject
of debate. Ken Usdin, a bank analyst at Jefferies Group LLC, said
Wells Fargo needs to ensure that the unit doesn't grow so big that
it imperils the bank's steady earnings growth. Investment-bank
earnings tend to be more volatile given market swings.
Investment banks also face the danger of being pushed by clients
into areas they don't know well or where they have to take too much
risk to win a lucrative fee.
The bank's executives say Wells Fargo's steps are measured. "We
drive faster and safer with a seat belt and air bags," said
Chairman and CEO John Stumpf in a recent interview.
In recent years, the bank enlisted former chairman and CEO
Richard Kovacevich to explain to employees and clients the new
investment-banking push. Mr. Kovacevich spearheaded Wells Fargo's
deal during the financial crisis to buy Wachovia Corp., which
included its investment bank as well as a major commercial
bank.
After a speech Mr. Kovacevich gave to employees January in New
York, investment-banking chief Jon Weiss opened up the questions by
asking: "What do you think of investment banking?" Mr. Kovacevich
responded that he supports the unit, though he has been cautious
historically about the business because he views many investment
bankers as taking too much risk.
In an interview, Mr. Kovacevich added: "It's amazing to me, five
years after" the Wachovia deal, that employees are "still asking
the question" if Wells Fargo will stay committed to the unit.
"We've walked the talk....but people still want to hear it," he
said.
The bank is sticking to what Mr. Kovacevich calls "normal"
activities like underwriting debt and equity, not higher-risk
trading activities or businesses that would attract flashier
financiers.
Nevertheless, in trading, a still-smaller area for Wells Fargo
that complements investment banking, the bank has increased assets
since 2009 by 82% to $78.3 billion at the end of 2014, compared
with an 8% increase at Bank of America, whose trading assets stood
at $278.9 billion.
Since the financial crisis, the lender has been able keep
expanding the investment bank in part because its other businesses
in lending and branch banking have proven less volatile and complex
than competitors with larger trading operations.
That makeup has helped Wells Fargo spend less time in the
regulatory penalty box. The bank has paid about $10 billion in
fines, settlements and other costs related to the financial crisis,
for example, less than half what J.P. Morgan has paid and less than
one-seventh what Bank of America has paid.
To make Wells Fargo more attractive to multinational companies,
the quintessentially American bank has taken some baby steps toward
foreign markets. In January, the bank began lending in Singapore.
Last year Mr. Stumpf traveled to Munich for client meetings for a
week, the longest time he has been in Germany, and Wells Fargo
officials visited the firm's Dubai office, opened in 2013.
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