NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) Chairman Richard Kovacevich says he feels like a kid in a candy store. But he’s taking his time to decide what to buy.
The San Francisco-based bank looked at Wachovia Corp WB.N and Washington Mutual Inc WAMUQ.PK this month, but lost deals to larger rivals Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N), respectively. Bank of America Corp (BAC.N) is also getting bigger with its planned purchase of Merrill Lynch & Co Inc MER.N.
Now Wells Fargo is the seventh-largest U.S. bank, passed this month by new bank holding companies Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), and dwarfed by rivals that have grown even larger with opportunistic acquisitions as the credit crisis wreaks havoc on the financial landscape.
As measured by market value, Wells Fargo remains a powerhouse, worth $124 billion, behind only JPMorgan Chase and Bank of America and ahead of Citigroup.
Analysts said Wells Fargo will continue to look for opportunities, but is not under pressure to pull the trigger.
“I would expect that at some point they would buy something, but I would hope that it would be on Buffett-esque terms, offering them full protection and little if any risk,” said Michael Farr, president of investment management company Farr, Miller & Washington. “There is an old expression, ‘Don’t borrow trouble’.”
Wells Fargo, one of the largest investments of Warren Buffett’s Berkshire Hathaway Inc (BRKa.N)(BRKb.N), had $609 billion in assets and about 3,300 bank branches as of June 30 concentrated in the western two-thirds of the country.
The bank continues to search for acquisition opportunities across financial services — banking, investments, insurance, mortgage and consumer finance, a spokeswoman said.
Earlier this month, Kovacevich said that, given the state of financial assets, he felt “like a kid in a candy store.”
“There’s going to be a lot of mergers and acquisitions for either good reasons or because people don’t have choices,” he said.
Wells Fargo has largely avoided the worst of the housing and credit crisis. In July, as some rivals posted quarterly losses, Wells Fargo said profit fell just 23 percent, although it more than quadrupled the amount reserved for bad loans to $3 billion.
A deal with Wachovia would have more than doubled its size and extended its reach across the United States, but also exposed it to many risky loans, including a $122 billion portfolio of a type of adjustable-rate mortgage that Wells Fargo never made on its own.
Its shares are up about 24 percent this year, trading at about 2.6 times book value, compared with a roughly 23 percent drop in the KBW Bank Index .BKX.
Wells Fargo could look at a bank that would help it move east, but it would likely have to be a company whose stock has come under pressure and so be a bargain, analysts said.
“You can get a lot more bang for your buck if you find yourself a bargain,” said Bart Narter, a senior analyst at financial research firm Celent. “And there are bargains to be had.”
Possible fits under that criterion could include Ohio-based banks National City Corp NCC.N and Fifth Third Bancorp (FITB.O), whose shares have been pummeled this year, analysts said. Both banks declined to comment.
Farr, who sold all his Wells Fargo shares in the last few days because he saw them as being fully valued, said the bank could also look at a strategic expansion through a purchase of an asset management business such as Legg Mason Inc (LM.N).
Legg Mason also declined to comment.
In recent years, Wells Fargo has emphasized organic growth, while also making small purchases.
In August, it agreed to buy Dallas-based Century Bancshares Inc, adding 28 branches in Texas and four in Arkansas. The latter will become the 24th U.S. state where it has branches.
“I think they are looking at a deal and if they do not see it as enough of a deal they are willing to walk away,” said Nancy Atkinson, a senior analyst at independent research firm Aite Group. “Wells is just not feeling tons of pressure.”
But the temptation may only increase as some of the other potential buyers leave with their purchases. Wells Fargo is one of the few remaining U.S. banks seen as strong enough to make large acquisitions.
“It’s possible that whatever the next one is that comes along, Wells won’t find themselves in any kind of a bidding war,” Atkinson said. “It would be an expansion only if the price were right.”
(For more M&A news and our DealZone blog, go to www.reuters.com/deals)
Additional reporting by Jonathan Stempel; Editing by Andre Grenon