Slow consistent growth has helped nurture Wells Fargo into the giant bank it is today.
Known for the strength of its retail banking, Wells Fargo has been stealthily making a name for itself in the far west of Midtown Manhattan, wherein it has chosen a new space which will be its base of operations for a stealth attack on the world of investment banking.
Its bid for more business from capital markets is potent with risks, despite being adept at advising companies on deals and related security issues for trading in derivatives.
Despite the risks of volatility in the boom-and-bust cycles of Wall Street, it would seem that Wells Fargo has identified a niche spot left behind by rivals in the wake of the 2008 financial crisis. Although trading brings in profits it also attracts exposes the third largest bank in the U.S. to extra risks and volatility.
“We’re not getting into things that are going to rapidly or dramatically change our business. It’s just a consistent, slow build-out. Add a person here, add a person there,” explained Jonathan Weiss, who runs Wells Fargo’s investment banking and trading division. He went on to add that the bank’s plans were strategically low-key.
Despite its purposeful low-key moves, Wells Fargo still managed to grab headlines. In December it announced a plan to buy up real estate the size of 10 football fields at Manhattan’s Hudson Yards development.
It followed that up with a deal rumored to be the most lucrative in the last decade. Furthermore, in a strategic decision, it has acquired a license to trade in credit derivatives so that it can capitalize on the growing revival in demand for a product that is just beginning to shed its negative image, since it had been earlier associated with the 2008 financial crisis.
The fact that it has become the world’s most valuable bank, with a market capitalization pf $243 billion was solely because it did not rely on complex derivatives or risky trades for its profits.
Its steady and calm approach could be read as a sign acknowledging that investors of wary of potential business risks from Wall Street. This wariness could in fact result in its shares taking a downward turn, although currently it they are traded at a premium, compared to other big banks such as JPMorgan Chase & Co.
“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. Otherwise, I would have to revisit the holdings,” said Thomas Russo, managing member at Gardner, Russo & Gardner, the bank’s 43rd largest shareholder.
As per Weiss, there is no cause for alarm, yet.
“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,” explained Weiss.
In fact, Warren Buffet, Well Fargo’s largest shareholder, has come down heavily on the financial system which tends to excessively use derivatives. He is totally on board the with the bank’s current approach and strategy. In fact, as per regulatory filings, Berkshire Hathaway Inc. has increased its stake to 10%.
Well Fargo’s move to buy more office space in a skyscraper overlooking the Hudson River, has been read as a symbolic move confirming the bank’s intention on growing rather than cutting down its workforce like many of its competitors.
“It was important to have the space that can be built out into a trading operation in the hope that we continue to grow,” said Weiss. Wells
Problems are opportunities in disguise
Faced with low interest rates and harshening conditions, many of its rivals have exited from investment banking. While other banks have seen problems, Wells Fargo’s current and former executives have seen opportunity.
“I had been very vocal in saying I didn’t believe investment banking was culturally compatible with our ethics and our business model. But as a result of the financial crisis, with investment banks becoming banks or being bought by them, the culture has changed,” said Richard Kovacevich, the former CEO of Wells Fargo who retired in 2009 but still has an office and regularly meets big investment bank clients.
Its rivals have noticed Wells Fargo ramping up its presence. Jamie Dimon, the CEO of JPMorgan had told Bloomberg earlier this month that Wells Fargo “very actively, very aggressively, and very successfully building its U.S. investment bank.”
Already this month, the Wells Fargo was named as the sole adviser to TransCanada Corp’s acquisition of the 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.
In 2013, Wells Fargo broke into the top 10 global investment banking fees chart and has remained there since then.