In an effort to boost its subscription finance business and take advantage of the deleveraging activities of the European banks, Wells Fargo & Company (WFC) has agreed to buy WestLB’s $6 billion subscription finance portfolio. While the deal terms were not disclosed, the company anticipates accomplishing it by the end of the second quarter itself.
Subscription finance involves the offering of revolving and term loans as well as letters of credit primarily to private equity and real estate investment funds to help them with their investment moves.
Wells Fargo has hired Dee Dee Sklar, former head of WestLB’s subscription finance group, to run the business. His team will comprise 14 members of whom 8 were previously working with WestLB.
Only last week, Citigroup Inc. (C) agreed to purchase part of the shipping loan book from Societe Generale SA (SCGLF). Deal terms were not revealed. Moreover, commercial real estate loans worth $760 million in U.S. key markets were sold off by Eurohypo AG to U.S. Bancorp (USB), Wells Fargo and The Blackstone Group LP (BX).
Amidst the Eurozone crisis and the need to build up capital levels to satisfy regulator’s stricter capital norms, European banks are shedding their businesses, in particular the non-core and the risky ones.
Especially, Wells Fargo is capitalizing on the deleveraging activities of the European banks. Earlier in February, Wells Fargo agreed to acquire the North American energy lending business of BNP Paribas SA (BNPQY) with nearly $9.5 billion of loan commitments and approximately $3.9 billion in loans outstanding. The acquisition was closed in April 2012. Moreover, in 2011, Wells Fargo also made loan portfolio purchases from Bank of Ireland (IRE) and Allied Irish Banks (AIBYY).
Apart from purchasing loan portfolios, the U.S. banks are also benefiting from the withdrawal of European banks from the competitive loan pricing market.
We believe that the deal is a strategic fit for Wells Fargo as it would help increase its share in the subscription finance market. The deal would also provide the cross-sell opportunities with the company planning to offer its full range of products and services to its clients.
Notably, Wells Fargo is benefiting from the turmoil in the financial market with a host of business acquisitions and loan book purchases. It has emerged strong and is eyeing European bank assets to boost its business. On the other hand, for WestLB, which has suffered losses in the recent years, the deal comes as part of its restructuring efforts.
Wells Fargo shares currently retain the Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
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