Amid the latest round of bank mergers, one big player still stands apart--and industry watchers are itching to pair it up. According to a flurry of Oct. 5 news reports, San Francisco's Wells Fargo & Co. might merge with First Union Corp. First Union quickly scotched the rumors, but there's no denying that Wells Fargo is unique in part because of what it's missing: The bank doesn't have a global presence, a big investment banking arm, or nationwide reach.
To hear Wells CEO Richard M. Kovacevich tell it, the bank doesn't need them either. A longtime skeptic when it comes to combining investment and commercial banking or buying merely to add bulk, Kovacevich is well aware of how some of his biggest rivals have stumbled. "Look at Bank of America," he says. Since its 1998 merger with NationsBank, it has suffered a string of disappointments, including the loss of much of its investment banking talent. Kovacevich estimates that "more than 50% of the time" combining an investment bank and a commercial bank does not work because the two cultures rarely mix. His mantra: "Culture is the key to success."
So Wells Fargo, which merged with Norwest Corp. in 1998, is quietly concentrating on banking in the western U.S., buying smaller banks, and integrating them well. Kovacevich hasn't ruled out the purchase of a retail brokerage house, but he says he'd let its investment bankers operate on their own. Not only is his strategy keeping Wells Fargo's customers satisfied, but its 1.78% return on assets outpaces such peers as Citigroup, Chase Manhattan, and FleetBoston Financial.
Some analysts and investors, though, are beginning to ask whether Kovacevich can stick to his plan. In an increasingly global economy, will there be room for a bank that does business only in the U.S.--and in only the western half of it, at that? Without a coast-to-coast presence, Wells Fargo may fall out of favor, says Eric J. Rajendra, a vice-president in the New York office of A.T. Kearney Inc., a Chicago consulting firm. "I don't believe that in the next five or 10 years investors will have confidence in a regional bank without national scope." That's not to say that Wells Fargo is a goner. "If the bank is nationwide, and dominates the consumer banking sector," then it'll be viable, Rajendra says.
Kovacevich, for his part, contends that going national isn't a smart goal. Instead, the bank has focused on increasing profits by selling additional products to its existing customers. Wells customers have bought an average of 3.7 bank products each. Kovacevich hopes to raise that number to eight. To date, Wells has been one of the few banks to make a success of cross-selling to customers.
NAYSAYERS. On the business side, naysayers worry that some of Wells' largest corporate customers could eventually turn to, say, Chase Manhattan or Bank of America for loan syndication, or Citigroup for underwriting. "Over time, these companies may graduate to more sophisticated products" that a purely commercial bank can't offer, says Hal Schroeder, portfolio manager with Carlson Capital, a Dallas hedge fund. Kovacevich concedes that to cater to large corporate clients, investment banking capabilities are a must. But the bank has concentrated on lending to smaller companies because profits on loans to giant corporations are "abysmal," he says.
On the consumer side, customers generally give the bank high marks. "A good bank to me is a bank that I don't know is there," says David Muraca, a 30-year-old ad exec and contented Wells Fargo customer in Los Angeles. "Kinda like your nose--you don't notice it until it gets in the way."
That may sound like a backhanded compliment. But considering the problems that the old Wells Fargo had when it bought First Interstate Bancorp in 1996, it's high praise. Then, computer glitches and branch closings drove customers to rival banks. "[Now] they've actually got intelligent personnel. What a concept," says Sandra Orientale, another Los Angeles customer of Wells.
It seems that Kovacevich is on to something. If the market allows him to pursue his strategy, Wells Fargo could prove a lot sturdier than many of the hastily assembled megabanks.