While the sluggish macroeconomic environment has been negatively impacting the investment banking business,Wells Fargo & Company (WFC) is all set to bolster in that area. The company aims to expand its investment banking and capital markets business under its Wells Fargo Securities division.
Situated in Charlotte, Wells Fargo Securities is a relatively small unit. However, according to industry estimates, it has tremendous growth potential. The unit is anticipated to account for roughly 10% of the company’s total revenue, up from about 5% presently. Other banking giants, such as JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Citigroup, Inc. (C), garner roughly 20%–25% of their revenue from investment banking.
Management at Wells Fargo believes in establishing the company’s investment-banking business in a way, which is different from that of its peers. Management plans to concentrate more on customers and will steer clear of the riskier measures.
Further, the company aims to focus more on services like underwriting of stocks and bonds as well as advising on mergers. Processing futures and swaps trades for investor will also be an area of operation.
The bank is focused on strengthening the futures clearing and execution business, since it is building a swaps clearing business required by new regulations. In August this year, Wells Fargo acquired Merlin. This led to Wells Fargo venturing into the business of providing trading, reporting and added services to hedge funds.
However, some investors are wary of Wells Fargo’s foray into investment banking might prove costly for the company in the current situation. Further, the sluggish macroeconomic environment might pose headwinds.
We believe the recent regulatory upheavals are compelling the company to turn to investment banking to stimulate growth.
Wells Fargo currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we also have a long-term Neutral recommendation on the stock.
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