Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Risk Management

12:32 PM
Connect Directly

Wells Fargo Has A Different Kind of Risk Management

Wells Fargo & Co doesn't employ the same kind of hedging strategy that has triggered a trading loss of at least $2 billion at rival JPMorgan Chase & Co, the bank's chief risk officer said.

Wells Fargo & Co doesn't employ the same kind of hedging strategy that has triggered a trading loss of at least $2 billion at rival JPMorgan Chase & Co , the bank's chief risk officer said on Tuesday.

The fourth-largest U.S. bank by assets also raised its return on assets target during an investor day for analysts, even as executives repeatedly stressed their focus on carefully managing risks in the bank's operations.

"You can't take out-sized risk in the financial services industry, and we do our best not to do it," Chief Financial Officer Tim Sloan said during a day of presentations by top executives in New York.

The San Francisco-based bank has emerged from the financial crisis as one of the strongest in the United States. But analysts posed questions about its securities portfolio and its investment banking ambitions following JPMorgan's trading blunder.

Wells Fargo does not do any "centrally directed macro portfolio hedges," Chief Risk Officer Mike Loughlin said in response to an analyst's question. The bank also does not run its $230 billion securities portfolio like a business line. Instead it uses these investments to balance the bank's risk from interest rate changes, said Treasurer Paul Ackerman.

Teams led by Sloan and wholesale banking head Dave Hoyt manage Wells Fargo's securities portfolio, spokeswoman Mary Eshet said.

Bank of America CEO Brian Moynihan said on Monday his bank also does not make broad hedging bets at the corporate level.

As another example of Wells Fargo's attention to risk, Sloan said the bank's credit default swaps portfolio grew too large three years ago, but has now been reduced to about a quarter of its original size. JPMorgan's trading strategy involved credit default swaps, a kind of derivative that was at the center of the 2008 financial crisis.

Wells Fargo aims for a return on assets of 1.3 to 1.6 percent, depending on the economic and regulatory environment, Sloan said. That top range exceeds the 1.5 percent target the bank laid out in 2010 and compares with a 1.31 percent ratio in the first quarter of this year.

Banks lately have been struggling to boost revenue at a time of weak loan demand and tight lending margins.


After expanding to the East Coast with its 2008 purchase of Wachovia Corp, Wells stepped back from doing acquisitions as it merged operations. But since the second quarter of last year, it has completed or agreed to seven deals to buy loan portfolios, business units or other companies.

Chief Executive John Stumpf said the bank does not have to do any acquisitions, but is interested in the right opportunities, including insurance firms, wealth management firms and more loan portfolios.

In its latest deal, the bank agreed to buy a prime brokerage firm, allowing it to offer clearing and other services to hedge funds for the first time.

In a question-and-answer session, NAB Research analyst Nancy Bush said the purchase of Merlin Securities set off a "tremble" among investors and asked how big the bank needs to be in the capital markets business. Stumpf said the bank's goal is to be able provide a broad array of services to corporate customers with which it has deep relationships.

In another presentation, community banking head Carrie Tolstedt said Wells plans to open more branches, a contrast to Bank of America, which is closing and selling branches. Wells has more than 6,200 U.S. branches, the most of any U.S. bank.

The bank is also rolling out new technology to speed service and cut costs, Tolstedt said. Touchscreen pads in teller lines will allow customers to receive receipts via email and to transfer funds, she said.

Mortgage head Mike Heid said the bank has options for reducing the negative impact mortgage servicing rights -- the right to collect payments from borrowers -- can have on its capital ratios under the new international standards called Basel III. The bank is looking at creating a market for selling these rights, while retaining the ability to collect payments. Some real estate investment trusts have expressed interest in the idea, Heid said.

Wells Fargo shares closed up .86 percent at $31.67 on Tuesday. The shares have climbed about 15 percent this year, better than the 11 percent increase in the KBW Bank Index . (Reporting By Rick Rothacker in Charlotte, North Carolina; Editing by Gerald E. McCormick, John Wallace, Matthew Lewis and Leslie Gevirtz)

Copyright 2010 by Reuters. All rights reserved.

Register for Wall Street & Technology Newsletters
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.