Wells Fargo is moving intently into investment banking. Can the company manage risk properly in its new environment or is it opening up Pandora's box?
Wells Fargo & Company (NYSE:WFC) has been trying to shift its focus from lending to investment banking in recent months. The change in focus culminated in the Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) acquisition of H.J. Heinz Company (NYSE:HNZ) announced earlier this month.
The increased presence of Wells Fargo & Company in investment banking is causing worry in some segments. A Wall Street Journal blog post published today highlights some of the problems of the bank’s move into capital deals. The post highlighted comments made by Moody’s Corporation (NYSE:MCO) about the developments.
The ratings agency said Wells Fargo & Company still had its major strengths in underwriting credit products. Capital market businesses are, according to the company, lucrative, but tend to lead to riskier activities. Wells Fargo & Company shares have not performed incredibly well so far in 2013.
The bank’s shares have risen by a fraction more than 3% since the start of the new year, trailing the 6% gains of the wider market. The firm’s investors do not seem convinced by the new strategy, and the firm’s mixed earnings report didn’t help convince them. The firm’s move into investment banking offer new opportunities, but adds risk to what has been one of the more stable large banks in recent months.
In the last twelve months, Wells Fargo & Company (NYSE:WFC) shares have increased by more than 16%. That increase has been relatively stable, despite a couple of sizeable drops in price. In the last twelve months the firm’s shares have ranged between $29.80 and $36.60. At the time of writing its shares stand at $35.26.
It has already been revealed that Wells Fargo is moving into private equity and other investment banking spheres by exploiting a loophole in the Volcker rule. The rule is designed to reduce risk by stopping banks from investing client’s money in risky investment practices.
Well Fargo & Company seems intent on spreading its investments across the investment banking sphere. The company is unlikely to stop those lucrative trades because Moody’s Corporation (NYSE:MCO) is concerned. There are fees to be earned and the financial giant doesn’t want to miss out on them any longer.
Investors may worry that the company is not going to be able to manage risk properly, and that it’s opening itself up to losses if there is a crash in the investment banking sector. Wells Fargo & Company (NYSE:WFC) doesn’t seem intent on slowing down, despite those concerns.