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Wells Fargo (WFC) in Restructuring Mode, May Expand Investment Arm

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Zacks Equity Research
·3 min read
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Banks are jumping on the bandwagon of streamlining operations to revive profitability amid the pandemic. Wells Fargo WFC, the third largest U.S. bank in terms of assets, is not an exception.

With the latest move, the bank is likely to expand its investment banking operations in the coming years, per Bloomberg. This segment, particularly, includes equity and debt underwriting, along with advisory services on mergers and acquisitions to corporate clients. The strategic actions are part of CEO Charles Scharf’s strategy to revamp the bank.

“We, obviously, on the investment-banking side don’t have the same market share that we have on the commercial-banking side,” Jon Weiss, head of the corporate and investment-banking business, said in an interview. “The opportunity that we have is to narrow that gap,” Weis added. Notably, per the source, Wells Fargo holds the ninth position in capital markets with peers, including JPMorganJPM, Bank of America BAC and Citigroup C, among the top four.

Though investment banking fees constitute a small part of total revenues (5.8% of total non-interest income as of Sep 30, 2020), the bank excels on commercial banking with middle-market clients. Therefore, revamping of investment banking operations will be aided by the bank’s existing relationships in the market.

Conclusion

Since the breakout of the bogus account openings scandal in late 2016, Wells Fargo has been involved in a number of probes and lawsuits, which have kept its expense level elevated and eroded earnings. Moreover, the bank’s assets position has been capped at $1.95 billion by the Federal Reserve. Nonetheless, the financial services firm has diligently undertaken several remedial measures and initiatives to remain afloat, which include divestiture/closure of non-core operations.

Scharf has overhauled some operations post deep review of the units after the scandal. With the streamlining of the branch network, the firm has been mulling divestiture of its asset management business as well.

However, Wells Fargo expects to bear the brunt of asset growth restrictions for a little longer as the company still has work to do for improving its control systems.

Scharf, in a conference recently noted, “We have to do the work”. “I can’t speak for the regulators. They’ll be the ones to determine when the work is done to their satisfaction, but again I can say it’s our priority.” Further, he believes that though the pandemic made work on this aspect more challenging, lifting of consent order is the bank’s priority.

Therefore, expansion in investment banking field is likely to enhance the firm’s profitability and pursue growth opportunities as other investment banks have excelled higher in this market despite the coronavirus mayhem.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). Shares of the company have rallied 16.5%, over the past six months, as compared with the industry’s growth of 27.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
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