To combat the decreasing revenue pressure,
Wells Fargo & Company
), 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
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. (
) 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
The Goldman Sachs Group, Inc. (
) 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.
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. (
) with a Zacks Rank #2 (Buy).
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