May 25, 2016 / 7:00 PM / 4 years ago

Wells Fargo stays coy as investment bank grows

NEW YORK, May 25 (IFR) - To the surprise of exactly no one, Wells Fargo played down talk of expansion in its investment banking business during this week’s investor day presentations.

The world’s biggest bank by market cap remains coy about its ambitions, deflecting analyst questions and trying to assuage concerns about mission creep into uncharted waters.

But ever since JP Morgan boss Jamie Dimon said earlier this year that Wells was aggressively building its investment bank - and that it was “almost impossible” to build one from scratch - the bank has been a bit on the defensive about the issue.

Jon Weiss, the head of the investment banking Wells Fargo Securities arm, walked the tightrope, acknowledging that the unit was growing while trying very hard to say it really wasn’t.

“We are not talking about a massive investment in a new business,” he said. “To the extent that we are growing, we are going to do it the Wells Fargo way - with discipline.”

That appeared to rule out any possibility that Wells would opt to acquire an investment bank, which Dimon’s decree suggested was the bank’s only way forward.

“The likelihood that would ever make an acquisition in investment banking is very, very remote,” said Tim Sloan, Wells Fargo’s head of wholesale banking.

“We don’t think that we need to do it.”


Many analysts agree with that assessment.

Rafferty Capital analyst Dick Bove said Wells Fargo already has the distribution, capital and customer base to break into the top ranks of investment banking without an acquisition.

“Of the top six banks, five are trading at a discount to book value,” he told IFR.

“The one bank that isn’t is arguing that they don’t get involved in areas of high risk,” Bove said.

“Wells Fargo’s dilemma is that if it says it is aggressively moving into capital market activities, the multiple on its stock will go down.”

Weiss insists the bank has actually been lowering risk even as it expands.

“While we have built out activities such as liquid products, mortgages and prime brokerage - and our business has grown consistently over the years - value-at-risk and other measures of risk have actually gone down,” he said.


For now, the bank said, Wells Fargo Securities accounts for roughly 6% of overall revenue and said it would likely stay in that range.

The group has about 4,500 industry and product investment bankers, sales and trading professionals research and analysts and support staff.

More than 90% of its revenue comes from the United States, and 95% of its team members are based in the US.

The investment bank derives roughly 60% of its revenue from origination and 40% from trading; fixed income represents about 28% of that, compared to 13% from equity trading.

Sales and trading is focused on distributing and making markets in securities issued by clients, rather than trading for the sake of trading, Weiss said.

In origination, real estate is the bank’s largest sector, accounting for 28% of revenue, followed by consumer, healthcare and gaming at 19%.

As it builds into new segments, Weiss said, Wells would focus on hiring people, rather than paying a premium to buy a business.

He said building as it goes gives Wells the freedom to design and scale new businesses based on current client needs, consistent with the new regulatory framework.

That also allows the bank to avoid the legacy issues that plagued JP Morgan and Bank of America, he said.

For his part Sloan, the head of wholesale banking, said the times have simply changed.

“People have realized that you can’t prostitute your balance sheet to get a fee.” (Reporting by Philip Scipio; Editing by Marc Carnegie)

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