NEW YORK, July 11 Wells Fargo & Co is angling to cash in on the U.S. energy boom, as the fourth-largest U.S. bank looks for new avenues of revenue growth to overcome a slump in mortgage lending, its traditional driver of profits.
The bank is increasingly looking for lending, investment banking and investing opportunities in the oil and gas sector. Unlike many of its divisions, which are primarily focused on the U.S. market, Wells Fargo's energy unit has expanded internationally. The bank says it now employs the largest staff of petroleum engineers of any U.S. bank.
"We have the biggest and most-focused business in that space," said Chief Financial Officer John Shrewsberry in an interview, noting that Wells has 400 employees dedicated to serving energy companies.
Wells Fargo's push into the sector provides a window into how the San Francisco-based bank plans to make up for the decline in mortgage income, which plummeted in 2013 as a refinancing boom came to an end. The bank has said its 89 other businesses, ranging from auto loans and credit cards to wealth management and investment banking, would eventually make up for the lost revenue as the economy accelerates.
"They're out on the sea in their boat and they've pitched their sails," standing ready to benefit from economic growth, said Tony Scherrer, director of research at Smead Capital Management. The Seattle-based investment firm has around $865 million in assets under management and owns Wells shares.
But so far growth has been tepid, with those other businesses failing to fully offset the decline in mortgages. In the second quarter, mortgage banking revenue was $1.7 billion, down 39 percent over the same period last year. Because of the diminished demand for home loans, both revenue and fee income at the bank has fallen for four consecutive quarters on a year-over-year basis.
The energy sector has been one of the brighter spots in the U.S. economy over the past few years, thanks to the shale oil and gas discoveries and the fracking boom. It has made millions for wildcat drillers, mineral-rights holders and oil-and-gas firms and supercharged economic growth in North Dakota, Texas, and other parts of the country.
Wells, which has had a presence in energy banking for 40 years, sees that as a unique opportunity for growth.
"We're in the real economy, and there are certain sectors of the economy that are doing very well. We are a big energy lender," Wells Fargo Chairman and Chief Executive John Stumpf said on a Friday conference call with analysts. Stumpf added that domestic production of crude oil was running at the highest level in 26 years.
Energy banking revenues have increased at a compound annual growth rate of 23 percent to $1.04 billion in 2013 from $690 million in 2011. Net income has grown at a similar pace, though Wells does not break out those numbers.
"We are continuing to invest in the business, and as we look forward we continue to see this as a major growth opportunity still, not only for corporate banking but for Wells Fargo," said Mike Johnson, head of corporate banking, at the bank's investor day in May.
The bank recently opened a small outpost in Aberdeen, Scotland to cater to energy businesses working in the North Sea. It also has a growing footprint in Calgary, Canada.
In 2012, Wells Fargo acquired a $3.5 billion portfolio of energy loans and a team of bankers from BNP Paribas. It has since increased the number of products that unit's clients used to 8 from 5 in 2013.
Shrewsberry said many large energy clients have also recently tapped Wells to handle their wealth management needs. He declined to give the identity of the clients. (Reporting by Peter Rudegeair; Editing by Diane Craft)