Wells Fargo to Raise Asset-Management Business to $1 Trillion

To combat the decreasing revenue pressure, Wells Fargo & Company WFC, the fourth-largest U.S. bank by assets is targeting the asset management industry to augment revenues, Wall Street Journal reported. The bank plans to double the size of its asset management unit to $1 trillion over the next decade from the current level of $490 billion in assets.

Wells Fargo is strategizing to augment its asset management unit through certain moves. The bank plans to increase its international sales force further and take over small asset managers to widen its product range. Notably, in recent years, Wells Fargo has come up with a number of acquisitions including purchase of a partial ownership stake of an alternatives manager in 2012 and international equity mutual funds firm in 2010.

Moreover, the bank now targets big investors such as pension funds to augment revenues. Further enhancing its portfolio, Wells Fargo sought regulatory approval in June with the Securities and Exchange Commission for initiating exchange-traded funds. Wells Fargo is also showing interest in liquid alternative mutual funds, which work like hedge-funds for further building up assets under management.

Notably, over the last few years, Wells Fargo has been focusing on global operations and has doubled its sales force. It has also worked on its product mix, which was concentrated on money-market funds in the early 2000s. Currently, Wells Fargo's asset management unit comprises 28% in traditional mutual funds, 22% in money-market funds and 50% in separate accounts for institutional investors.

Wells Fargo's revenues have suffered due to a slump in the mortgage market as refinancing activity has been subdued. Moreover, under regulatory pressure, banks are being deprived from large acquisition deals, which could have boosted revenues. Therefore, driven by the low capital requirement nature of the asset management business and a steady revenue stream, Wells Fargo aims to expand this unit. Notably, total revenue of the bank came in at $21.07 billion in the second quarter, down 1.5% year over year.

Moreover, amid the ongoing trend in the industry under which investors are increasingly becoming inclined towards passively managed products like index funds and exchange-traded funds compared with traditional mutual funds, Wells Fargo recorded $1.6 billion of net outflows in its mutual funds in 2013 and $1 billion as of Jul 2014. Further, investors are pulling out money from ultrashort-term municipal-bond fund over concerns surrounding rising interest rates.

However, among other big banks, JPMorgan Chase & Co. JPM recorded strong inflows from investors of $17 billion in 2013 and $17.5 billion as of Jul 2014. The inflows ride on selling funds to small investors and expanding its portfolio with the offering of target-date funds.

The Goldman Sachs Group, Inc. GS also has a basket of inflows with $14.6 billion into its funds in 2013 and $13.4 billion as of Jul 2014. Efficient working of financial advisers and a steady performance has yielded such results for the firm.

Conclusion

Given the competitive environment and the stringent regulatory landscape, banks are facing tough challenges in controlling costs and increasing revenue. This is certainly restricting their bottom-line growth. To make matters worse, a number of major banks have been encountering legal overhangs in recent times.

Further, due to a prolonged low interest rate environment, several banks are witnessing a continuous decline in net interest income and pressure on net interest margin. Thus, a significant turnaround seems elusive in the near term. Moreover, absence of credible improvement in the mortgage market is another headwind.

Therefore, given the underlying strength in the asset management industry, it will be a prudent decision for Wells Fargo to expand its unit. Further, the asset management business is expected to perform well in the upcoming quarters with the rising demand for personalized and alternative investment solutions, which will help the bank in augmenting its revenue.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). A better-ranked finance stock worth considering includes German American Bancorp Inc. GABC with a Zacks Rank #2 (Buy).

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