Wells Fargo Stands Out, Talking Growth and M&A

Like its peers, Wells Fargo & Co. emphasized future cost reductions in its fourth-quarter earnings report. But the San Francisco bank's rationale for trimming expenses is significantly cheerier.

JPMorgan Chase & Co. and Citigroup Inc. are weathering a slump in the capital markets business, and the latter company suggested that a bleak outlook for overall profitability might make broader reductions necessary. Wells, by contrast, reported record earnings and argued that its existing operations could be significantly more profitable. The company is even talking about potential acquisitions, which would be hard to imagine for some of its rivals.

Cost cutting "certainly won't be the primary driver for earnings in the future," Wells' chief financial officer, Timothy Sloan, told American Banker in an interview on Tuesday, in which he framed the bank's planned cuts as a matter of efficiency.

In all, Wells bounced back after disappointing results last quarter, with a 20% jump in earnings over a year earlier, despite the sluggish economy.

Wells Fargo posted $4.11 billion in profits, or 73 cents a share, up from $3.41 billion, or 61 cents a share, a year earlier. Revenue fell 4.1% to $20.6 billion.

The bank also reiterated its focus on cutting roughly $1.5 billion over the next year on a Tuesday morning call with analysts.

"We are maintaining our target of $11 billion in noninterest expense in the fourth quarter of 2012," said Sloan in a press release.

The company reported $12.5 billion in non-interest expenses in the fourth quarter, down 6% from a year earlier.

Wells completed its integration of former Wachovia branches in the fourth quarter, and intends to book its last merger expenses in the first quarter of this year.

That, along with reduced compensation expenses, should cut costs by $500 million to $700 million, by the second quarter of 2012.

"The bank is working well," said FBR Capital's Paul Miller, pointing to the strength of its mortgage operation. "They've done a great job staying out of a lot of the problems. While I wasn't saying it at the time, the acquisition of Wachovia was a gift."

Further savings will come from what Wells believes will be declining foreclosure prevention and remediation costs and consolidation efforts in its consumer lending business, which were announced last summer.

Given that Wells' exposure to capital markets is much smaller than that of its peers, the quarter served as a reminder of why investors have traditionally valued the company at a higher multiple than competitors.

"The fact that we have a diversified model, that we're not as necessarily dependent on one business for success, is very helpful in this kind of economic environment we're in," Sloan told American Banker.

Wells' target of $11 billion in quarterly non-interest expense by the end of next year implies that the company sees a smaller headcount as key to growing profitability, Miller says.

While Wells' net interest margin improved slightly to 3.89% this quarter, Miller doesn't see anything to gain from pushing harder to make loans.

"It just seems like Wells is already more comfortable putting lower yielding assets on its book," he says. "I don't think they're going to be able to replicate their NIM next quarter."

The rate at which Wells is building capital suggests that the company may be in a position to release more capital to its shareholders.

While Wells' management declined to discuss their dividend and buyback plans before they're vetted by regulators in March, the bank appears to be more than on target to meet Basel requirements.

At the very least, Miller said, "they probably get to buy more stock this year."

Increased cost savings and bulked up capital may also free up additional cash and position the bank to grow its business through acquisitions at a time when some of its largest competitors, Citigroup and Bank of America Corp., continue to put chunks of their businesses on the sale block.

The bank reported that its cash holdings rose 21% from a year prior. Wells had $19.4 billion on hand as of Dec. 31 and estimates its Tier I common equity ratio is 9.5% under Basel I and 7.5% under Basel III.

"We are kicking lots of tires," Stumpf said, repeatedly, on an analyst call, about the potential for new acquisitions.

"We're in a unique position that we're not capital constrained," he added, while noting that the bank is "cautious" in its purchase strategy.

Sloan notes that the company has a history of growth through acquisitions.

"We've always been an acquisition business so this isn't something necessarily new to us," he told American Banker.

He says that with the Wachovia integration nearing its end, the bank has renewed its search for strategic buys.

"As we made progress in terms of the integration, it made sense to us to start to look at acquisitions, because that's one of the ways that we've been able to grow," Sloan says.

The company has already made several buys over the past few quarters, including the purchase of LaCrosse Global Fund Services, a managed hedge fund administration and middle-office service provider, in September.

From now on, "our focus is going to be on U.S.-based assets and businesses, which we think we can underwrite and price appropriately," Sloan said.