Will Wells Fargo’s Deliberate Expansion Strategy Pay Off?
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The close of business this past week came with a smashing finish as bank stocks rose. Wells Fargo (NYSE: WFC) gained almost $0.50 rising nearly 1.5%. Other companies in the financial sector increased as well. Central Virginia Bankshares were up 19%, American Spectrum Realty topped 14%, EHouse China Holdings scored a rise to 13% and Security National Financial rose just under 13%.
Overview
Wells Fargo and its subsidiaries provide retail, commercial and corporate banking services predominantly in the United States. It operates in three arenas: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement. Shares are up 21% year to date. The company has a P/E ratio of 11.4 about average for the banking industry, though below the S&P 500 P/E ratio of 17.7. US Bancorp (NYSE: USB), Wells Fargo and private equity firm Blackstone Group recently purchased a portfolio of $750 million in U.S. performing loans from German lender Eurohypo. Each company will wn its portion as a separate loan package though the Wells Fargo/Blackstone bid was a joint offer. The purchase is about 5-10% less than face value.
US Bancorp will assume $180 million of the overall purchase. Wells Fargo and Blackstone will split the remaining $560 million of loans having bid together. The loans put on the market by Eurohypo were a way to reduce its balance sheet of about $4 billion in U.S. loans. Many failed European banks face take over by the government. This sell off is a move on Eurohypo’s part to avert any future government intervention. Eurohypo was a very active lender during the U.S. real estate boom of 2003 to 2007. Wells Fargo and JP Morgan Chase (NYSE: JPM) have been snatching up performing loans at a discount for some time. Meanwhile, Bank of America is preparing to divest its international units in an effort to streamline operations and shift its focus to core businesses. The sale comprises nearly $90 billion worth of assets. Wells Fargo is expected to be one of the possible bidders along with UBS AG, Deutsche Bank and JP Morgan Chase.
Strategy
In an effort to promote the economy and raise its image, Wells Fargo is offering $30 billion in loans and investments through 2020 to promote a “greener” economy. The bank will be supporting solar energy-efficient buildings. In addition, Wells Fargo will be lending $100 million in community grants for grassroots environmental initiatives to support more volunteers to plant and care for city trees and open spaces. Wells Fargo itself sets the example of energy efficiency by aiming for a reduction in waste of 65% by 2020. The company is targeting a 35% reduction in greenhouse gas emissions below 2008 levels and is leading the way in environmental design of its buildings.
It is not in just the environment that Wells Fargo is posting records. The first quarter saw Wells Fargo beating analysts’ expectations by earning $4 billion, an increase of 13% over a year ago. Revenues first quarter reached $21.6 billion, up 6%, which is quite an achievement. This is the highest quarterly revenue in nine quarters. Much of the revenue increase is due to a flood of mortgage applications. Total loans are decreasing slightly and lending is remaining flat. Mortgage banking is the key driver in Wells Fargo’s current success. Revenue in this area increased 42%. Applications rose 20% in the first quarter. Most of the applications are for refinancing. As a result of such strong quarterly returns, Wells Fargo announced a stock dividend of $0.22 per share. The dividend is payable June 1, 2012. Bernanke and the central bank will continue to support the economic recovery by insuring interest rates remain low through at least 2014, which is good news for the banking industry.
Wells Fargo also announced that it has completed the acquisition of the North American reserved-based and related diversified energy lending business of BNP Paribas. With the completion of the transaction, Wells Fargo adds to its strong energy industry presence. The combined Wells Fargo Energy Group business has more than $30 billion in loans. This acquisition significantly diversifies Wells Fargo’s client base, loan portfolio and presence in the energy industry. The Energy Group is in Houston. The Group is a financial leader, offering integrated financial solutions to public and private companies. In 2009, Wells Fargo completed the acquisition of Wachovia Bank. This provides Wells Fargo with an ever-expanding footprint on the East Coast. At the moment, this is a market wide open to expansion. It offers tremendous growth opportunities for Wells Fargo.
In yet another acquisition move, Wells Fargo announced the purchase of prime broker Merlin Securities. This will be the bank’s first step into prime brokerage services for clients, which will include hedge fund managers, records-handling and trade-clearing services. Merlin’s technology and current client base give Wells Fargo a boost in its equities trading. Meanwhile, hedge fund assets are expanding. Investors invested more than $16 billion into these types of funds in the first quarter. Globally more than $2.14 trillion of capital is in hedge fund investments. Wells Fargo was fortunate to avoid the risks that took down its competitors during the financial crisis. Wells Fargo will use this acquisition to parlay itself in to the prime brokerage market and grab some business away from Goldman Sachs (GS).
Looking Ahead
In a global move to capture market share, Wells Fargo announced it is analyzing the option of opening a bank branch in India. India has a huge potential of trade volume. Wells Fargo has already formed a partnership with HDFC Bank India’s second-largest private-sector lender to offer remittance services from the U.S. to India. Wells Fargo is methodical about its current strategy. It is very deliberately buying businesses and assets that will help grow the bank despite the slow economic recovery. The strategy at the moment is paying off handsomely.
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