Diving into the mire
Wells Fargo leaps into a swamp from which most banks are retreating
WHEN Wells Fargo’s competitors were spending fortunes building up big investment-banking operations in the 1980s and 1990s, the bank’s chief executive at the time, Richard Kovacevich, refused to follow suit, joking that the business would be a good one to get into were it not for all the people who worked in it. Instead he concentrated on building up a nationwide network of branches (“stores” in Wells-speak) to take in deposits and sell mortgages, credit cards and insurance. This strategy was vindicated when the financial crisis struck, turning once lucrative investment-banking franchises into millstones. Wells, meanwhile, became the most profitable big bank in America.
But an odd thing happened in the process. Wells’s strength during the crisis allowed it to snap up Wachovia, a regional bank whose dense network in the eastern part of country perfectly complemented Wells’s in the west. Wachovia also happened to have a sizeable investment bank.
Many assumed Wells would promptly sell the unit, or shut it down. Instead, it has expanded it, even as other banks have been hacking away frantically at their investment-banking arms. In the first quarter of 2007, before the takeover of Wachovia, Wells had no investment-banking revenue at all; Wachovia underwrote $831m-worth of share offerings, putting it twelfth in the American rankings. In the first quarter of this year, Wells underwrote $1.23 billion of share offerings, putting it ninth in the rankings (see chart). It recently bought six stories of a skyscraper under construction in Manhattan, which will include two big trading floors.
Wells’s investment-banking operation is still far smaller than those of the giants of Wall Street: JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of America. But its equity underwriting in America has surpassed that of Deutsche Bank, which had sought to elbow in to the top ranks. Jamie Dimon, the boss of JPMorgan Chase, recently noted that Wells was “actively”, “aggressively” and “successfully” building an American investment bank.
There are clear limits to Wells’s ambition. The Wachovia deal notwithstanding, it is not fond of takeovers, which it believes bring unforeseen problems and employees who will bolt unless rewarded (those dreadful investment bankers again), at a cost that would make its existing staff bitter. It also has limited interest in expanding abroad, since it does not want to have to navigate multiple regulatory regimes. Fully 95% of the employees of its investment bank are in America; 90% of its revenues originate there.
Instead, Wells hopes to grow in America by helping more of its corporate customers buy derivatives, issue debt or equity, or navigate takeovers. Investment banking currently produces about 5% of the bank’s revenues; it says it would like the number to rise to as much as 15%, but no higher.
Wells’s sudden enthusiasm for the business may seem counterintuitive, but it has always sold itself as a fast-growing company. Retail and commercial banking are competitive businesses; last year Wells’s revenues were up by a mere 2%—and that was still better than most of its rivals.
Regulators are also trying to discourage America’s biggest banks from growing much bigger (Wells is already the third-biggest by assets, with a balance-sheet of $1.8 trillion). There is talk of requiring the biggest ones to hold even more capital, beyond the surcharge already imposed on “systemically important” ones. In that sort of climate, a business which could make more efficient use of existing clients and which holds out the promise (often forlorn) of higher returns on capital is hard to ignore.