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 Wells Fargo & Co, the San Francisco-based lender known for its
retail banking business, has picked out space for a trading
operation to use as a base for a stealth attack on the investment
banking world.
The bid for more capital markets business - from advising on deals
and security issues to trading derivatives - is a potentially risky
move by the third-largest U.S. bank by assets.
The boom-and-bust of Wall Street offers lucrative fees if Wells
Fargo can pick up business left behind by rivals in the wake of the
financial crisis of 2008, but trading brings extra risks and
volatility.
Jonathan Weiss, who runs Wells Fargo's investment banking and
trading division, said the bank's plans were deliberately low-key.
"We're not getting into things that are going to rapidly or
dramatically change our business," he told Reuters in a phone
interview earlier this month. "It's just a consistent, slow
build-out. Add a person here, add a person there."
Despite Weiss's muted tone, Wells Fargo has made some
headline-grabbing moves.
In December it announced a deal to buy 500,000 square feet - or 10
football fields - of trading and office space at Manhattan's Hudson
Yards development. Its neighbors will include private equity firm
KKR & Co and media titan Time Warner Inc.
Earlier this month it clinched what is expected to be its most
lucrative mergers and acquisitions (M&A) assignment in at least a
decade. And it has acquired a license to trade credit derivatives,
so it can take advantage of revival in demand for a product starting
to overcome its association with the last financial crisis.
Wells Fargo built itself into the world's most valuable bank - with
a market value of $243 billion - in the wake of the financial crisis
partly because it did not rely on risky trades or complex
derivatives to turn a profit.
Its quiet approach may be an acknowledgement that investors are wary
of potentially risky Wall Street business and may mark down its
shares, which currently trade at a premium to other big U.S. banks
such as JPMorgan Chase & Co <JPM.N>.
"If I felt the bank were making a big investment banking push, they
would need to do a good job of explaining why it has not made them
riskier," said Thomas Russo, managing member at Gardner, Russo &
Gardner, the bank's 43rd largest shareholder. "Otherwise, I would
have to revisit the holdings."
Weiss said there was no cause for alarm.
"Our pace of growth is not so significant relative to the overall
growth the bank has experienced that shareholders need be concerned
that somehow we're growing some massive set of risks," he said.
Wells Fargo's largest shareholder, Warren Buffett - who has
criticized the financial system's excessive use of derivatives -
seems to be on board with the bank's plans. His Berkshire Hathaway
Inc has increased its stake to 10 percent according to regulatory
filings on Monday. Buffett declined to comment on whether he thinks
the bank will become a riskier investment.
OLD-SCHOOL, NEW BUILDING
Wells Fargo is still focused on its traditional business of lending
to consumers and corporations and managing people's money.
Trading and investment banking accounted for just 4.6 percent of
Wells Fargo's 2015 revenues, with part of the trading coming from
outside the securities division, according to a spokeswoman.
That compares to about 26 percent for JPMorgan, counting only
trading in its investment bank unit, according to its year-end
earnings. Wells Fargo sees market share up for grabs as lenders such
as Deutsche Bank AG <DBKGn.DE> and Barclays Plc <BARC.L> cut back
their investment banking business in response to tough post-crisis
regulations.
Buying offices in a 90-story, glass-and-steel tower overlooking New
York's Hudson River - with a move-in scheduled for 2020 - is a
symbolic move that shows the bank is intent on growing rather than
making cuts like many Wall Street firms.
Nearly one-third of the bank's office space is to be taken up by two
trading floors, according to the developer's news release in
December, but Weiss said it was not yet clear how big the dealing
operation would be.
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"It was important to have the space that can be built out into a
trading operation in the hope that we continue to grow," he said.
Wells Fargo's investment banking and trading operations are
currently housed in 350,000 square feet spread across four separate
buildings in New York.
That represents a big leap for a bank seen as a sleeping giant in
the U.S. investment banking industry. It has the balance sheet and
lending relationships to be a top player, but a culture more in
touch with Main Street than Wall Street.
Wells Fargo's bosses have made fun of Wall Street's self-importance.
Chief Executive John Stumpf, a farmer's son from Minnesota, likes to
say he prefers kitchen tables to "league tables" - the rankings used
by investment banks to measure their standing.
But as Wall Street rivals exit and low interest rates force banks to
look for more sources of revenue, Wells Fargo's current and former
executives see more opportunities.
"I had been very vocal in saying I didn't believe investment banking
was culturally compatible with our ethics and our business model,"
said former Wells Fargo CEO Richard Kovacevich.
"But as a result of the financial crisis, with investment banks
becoming banks or being bought by them, the culture has changed,"
said the 72-year-old banker, who retired in 2009 but still has an
office at Wells Fargo and meets with big investment bank clients.
AGGRESSIVE COMPETITION
Rivals have noticed the bank's ramped-up presence. JPMorgan CEO
Jamie Dimon told Bloomberg earlier this month Wells Fargo was "very
actively, very aggressively, and very successfully building its U.S.
investment bank."
This month, Wells Fargo was named sole adviser to TransCanada Corp
on its acquisition of Columbia Pipeline Group, a deal worth $13
billion including debt, putting it on track for its biggest fees
from a single deal since at least 2000, according to data from
Thomson Reuters and Freeman Consulting Services.
Wells Fargo broke into the top 10 for global investment banking fees
in 2013 and has stayed there since, according to Thomson Reuters
data.
It is looking to juice its growth further by hiring a new rainmaker
to head its M&A franchise, leading a team of bankers that has grown
by 40 percent over the past five years, outstripping rivals even as
M&A surged across the board.
Wells Fargo is also expanding in prime brokerage, a lucrative
business offering loans, trading, cash management and other services
to hedge funds. It bought mid-sized prime broker Merlin Securities
in 2012, expanded it to target larger hedge funds, and still has
room to grow, according to Weiss.
The bank is also expanding in derivatives that allow investors to
bet against companies' debt, recently getting regulatory approvals
to trade single-name and indexed credit default swaps, as well as
swaps based on indexes.
Such derivatives were blamed for spreading mortgage-related losses
during the financial crisis, but they are enjoying a revival as
corporate bonds dip on tumbling energy prices and companies look for
a way to manage interest rate, commodity price and currency risk.
"That has been a big addition and a thoughtful way to take the
derivatives question into the board room or into the 'C-Suite' as
something more than just a trade that you do on a desk," said Weiss.
(Reporting by Dan Freed in New York; Editing by Carmel Crimmins and
Bill Rigby)
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