Analysis: Wells Fargo eyes investment bank buildout

A pedestrian walks past a Wells Fargo & Co bank in San Francisco, California, April 22, 2009.

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N), which has long prided itself on its stable community banking roots, is steering the stage coach down a riskier path.

After once dismissing the idea of getting into investment banking, San Francisco-based Wells Fargo appears to be developing a taste for sales and trading, as demand for U.S. consumer and business loans stagnates.

Almost two years after buying troubled Wachovia Corp and cutting back its investment bank unit, Wells Fargo is hiring new employees and even rehiring former Wachovia staff for select positions within its investment bank.

This newfound enthusiasm has analysts speculating the bank sees a better chance of expanding through investment banking than through its traditional consumer banking business.

"They're a pretty big player and they have to move," said Blake Howells, an analyst at Becker Capital Management.

At the end of April Wells Fargo announced it was expanding a business that repackages mortgages, and more recently it added a similar unit for commercial mortgages.

It also retained a derivatives business from Wachovia that structures investment products for individual investors.

Wells Fargo has sold more than $300 million of these products since the start of the year, although it remains a small issuer compared with larger peers such as JPMorgan Chase (JPM.N) and Bank of America Corp (BAC.N), according to data from StructuredRetailProducts.com.

With these ventures, Wells Fargo is not shying away from some of the riskier elements of investment banking, but it has said it will focus on customer business rather than taking on risk for its own account.

"Investment banking is something that we think we can be very successful at over time doing it our way -- customer-focused, and not leading with credit," said Tim Sloan, a Wells Fargo executive vice president, at its investor day in May.

The fourth-largest U.S. bank still has some catching up to do with the top three. Bank of America had $2.4 trillion in assets at the end of the second quarter, JPMorgan had $2 trillion, Citigroup had $1.9 trillion and Wells Fargo had $1.2 trillion.

"Another $1 trillion in assets and they're up there with Bank of America, JPMorgan and Citi," Howells said.

None of the bank's executives were available to talk about the expansion and Wells Fargo does not separate its investment banking and capital markets results in its quarterly earnings, so it is hard to measure the impact of expansion efforts on the bottom line.

But by at least one measure, Wells Fargo's expansion appears to be beginning to pay off.

In a ranking of U.S. banks by proceeds from U.S. equity and equity-related underwriting, Wells Fargo is in eighth place year-to-date, according to Thomson Reuters data, up from 10th at the end of last year. The bank has also climbed a spot in U.S. bond underwriting to 12th place for year-to-date deals, up from 13th at the end of last year.

OUT OF CHARACTER?

Former longtime Chief Executive Richard Kovacevich once said investment banking was "incompatible" with its main consumer banking business.

Indeed, Wells Fargo, which was founded in 1852 during the California gold rush, initially slashed jobs from the investment banking unit at Wachovia, which it bought at the height of the financial crisis in 2008.

Jumping into investment banking, particularly at a time when regulatory costs are surging and capital markets are still volatile, is a move that some investors may see as out of character for Wells Fargo.

But analysts said it is a logical step for a bank looking to increase revenues.

"The brokerage business and investment banking would probably be the next step (for Wells Fargo) in terms of rounding out the business mix that all the national firms have," said Marty Mosby, analyst at Guggenheim Partners.

Wells Fargo, which is the largest U.S. mortgage lender, has seen profits from this business fall as fewer Americans are buying homes during the recession.

Lending broadly is under pressure as the unemployment rate hovers near 10 percent, borrowers with good credit are reluctant to take on new debt, and banks resist lending to riskier borrowers.

Amid the recession, investment banking revenues have helped offset losses from consumer businesses at Bank of America Corp and JPMorgan Chase & Co.

Banks such as Wells Fargo are looking to increase revenues by expanding existing businesses or making the most of acquisitions such as Wachovia, analysts said.

"Wells Fargo has the opportunity to continue to build earnings momentum off of Wachovia," said Mosby.

(Reporting by Elinor Comlay, editing by Matthew Lewis)