Wells Fargo Quietly Plans To Disrupt Banking Business

As Wall Street remakes itself on a former rail yard in the far west of Midtown Manhattan, one surprising name is leading the way.

Wells Fargo & Co., the San Francisco-based lender known for its retail banking business, has picked out space for a trading operation to use as a base for a stealth attack on the investment banking world.

The bid for more capital markets business - from advising on deals and security issues to trading derivatives - is a potentially risky move by the third-largest U.S. bank by assets.

The boom-and-bust of Wall Street offers lucrative fees if Wells Fargo can pick up business left behind by rivals in the wake of the financial crisis of 2008, but trading brings extra risks and volatility.

Jonathan Weiss, who runs Wells Fargo's investment banking and trading division, said the bank's plans were deliberately low-key.

"We're not getting into things that are going to rapidly or dramatically change our business," he told Reuters in a phone interview earlier this month. "It's just a consistent, slow build-out. Add a person here, add a person there."

Despite Weiss's muted tone, Wells Fargo has made some headline-grabbing moves.

In December it announced a deal to buy 500,000 square feet - or 10 football fields - of trading and office space at Manhattan's Hudson Yards development. Its neighbors will include private equity firm KKR & Co and media titan Time Warner Inc.

Earlier this month it clinched what is expected to be its most lucrative mergers and acquisitions (M&A) assignment in at least a decade. And it has acquired a license to trade credit derivatives, so it can take advantage of revival in demand for a product starting to overcome its association with the last financial crisis.

Wells Fargo built itself into the world's most valuable bank - with a market value of $243 billion - in the wake of the financial crisis partly because it did not rely on risky trades or complex derivatives to turn a profit.

Its quiet approach may be an acknowledgement that investors are wary of potentially risky Wall Street business and may mark down its shares, which currently trade at a premium to other big U.S. 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," said Thomas Russo, managing member at Gardner, Russo & Gardner, the bank's 43rd largest shareholder. "Otherwise, I would have to revisit the holdings."

Weiss said there was no cause for alarm.

"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," he said.

Wells Fargo's largest shareholder, Warren Buffett - who has criticized the financial system's excessive use of derivatives - seems to be on board with the bank's plans. His Berkshire Hathaway Inc has increased its stake to 10 percent according to regulatory filings on Monday. Buffett declined to comment on whether he thinks the bank will become a riskier investment.

OLD-SCHOOL, NEW BUILDING

Wells Fargo is still focused on its traditional business of lending to consumers and corporations and managing people's money.

Trading and investment banking accounted for just 4.6 percent of Wells Fargo's 2015 revenues, with part of the trading coming from outside the securities division, according to a spokeswoman.

That compares to about 26 percent for JPMorgan, counting only trading in its investment bank unit, according to its year-end earnings. Wells Fargo sees market share up for grabs as lenders such as Deutsche Bank AG and Barclays Plc cut back their investment banking business in response to tough post-crisis regulations.

Buying offices in a 90-story, glass-and-steel tower overlooking New York's Hudson River - with a move-in scheduled for 2020 - is a symbolic move that shows the bank is intent on growing rather than making cuts like many Wall Street firms.

Nearly one-third of the bank's office space is to be taken up by two trading floors, according to the developer's news release in December, but Weiss said it was not yet clear how big the dealing operation would be.

"It was important to have the space that can be built out into a trading operation in the hope that we continue to grow," he said. Wells Fargo's investment banking and trading operations are currently housed in 350,000 square feet spread across four separate buildings in New York.

That represents a big leap for a bank seen as a sleeping giant in the U.S. investment banking industry. It has the balance sheet and lending relationships to be a top player, but a culture more in touch with Main Street than Wall Street.

Wells Fargo's bosses have made fun of Wall Street's self-importance. Chief Executive John Stumpf, a farmer's son from Minnesota, likes to say he prefers kitchen tables to "league tables" - the rankings used by investment banks to measure their standing.

But as Wall Street rivals exit and low interest rates force banks to look for more sources of revenue, Wells Fargo's current and former executives see more opportunities.

"I had been very vocal in saying I didn't believe investment banking was culturally compatible with our ethics and our business model," said former Wells Fargo CEO Richard Kovacevich.

"But as a result of the financial crisis, with investment banks becoming banks or being bought by them, the culture has changed," said the 72-year-old banker, who retired in 2009 but still has an office at Wells Fargo and meets with big investment bank clients.

AGGRESSIVE COMPETITION

Rivals have noticed the bank's ramped-up presence. JPMorgan CEO Jamie Dimon told Bloomberg earlier this month Wells Fargo was "very actively, very aggressively, and very successfully building its U.S. investment bank."

This month, Wells Fargo was named sole adviser to TransCanada Corp on its acquisition of 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.

Wells Fargo broke into the top 10 for global investment banking fees in 2013 and has stayed there since, according to Thomson Reuters data.

It is looking to juice its growth further by hiring a new rainmaker to head its M&A franchise, leading a team of bankers that has grown by 40 percent over the past five years, outstripping rivals even as M&A surged across the board.

Wells Fargo is also expanding in prime brokerage, a lucrative business offering loans, trading, cash management and other services to hedge funds. It bought mid-sized prime broker Merlin Securities in 2012, expanded it to target larger hedge funds, and still has room to grow, according to Weiss.

The bank is also expanding in derivatives that allow investors to bet against companies' debt, recently getting regulatory approvals to trade single-name and indexed credit default swaps, as well as swaps based on indexes.

Such derivatives were blamed for spreading mortgage-related losses during the financial crisis, but they are enjoying a revival as corporate bonds dip on tumbling energy prices and companies look for a way to manage interest rate, commodity price and currency risk.

"That has been a big addition and a thoughtful way to take the derivatives question into the board room or into the 'C-Suite' as something more than just a trade that you do on a desk," said Weiss.