Wells Fargo (WFC)

The Wachovia Corporation (NYSE: WB) was the fourth largest bank holding company in the United States prior to it being acquired on December 31, 2008 by Wells Fargo (WFC). Though Wachovia had grown to become one of the largest full-service financial services firms in the U.S., exposure to the weakening U.S. real estate market caused it to become one of the many casualties of the 2008 credit crisis. Despite reassurance from management that Wachovia would be able to limit losses on mortgage-backed securities and continue to fund operations as normal, eroding investor confidence punished the firm's stock price and forced the quickly arranged sale of its banking operations to U.S. banking giant Citigroup for $2.1 billion in stock. Just a week after this announcement, rival Wells Fargo (WFC) announced a $15.1 billion bid for all of Wachovia, not just its banking operations.^[1] Wachovia was finally allowed to complete the acquisition for approximatley $14.5B in WFC stocks.^[2]

History

Wachovia was established in 2000 through the merger of First Union and the predecessor Wachovia Corporation. A series of mergers and acquisitions developed the basis of what the company is today. Recent transactions provided the firm with an increasing market share along the south-eastern United States. Before 2005, the company was known throughout the east coast as a premier commercial bank that focused on middle-market and small business banking. In 2006, the company acquired Golden West Financial and Westcorp is entering the west coast banking environment which has been predominantly served by Bank of America and Wells Fargo. In 2007, Wachovia also completed its acquisition of A.G. Edwards & Sons, Inc.

Business Lines

Wachovia's revenues are well diversified among its 4 key businesses:

General Banking

With a presence in 21 states, Wachovia focuses on individuals, governmental agencies, small businesses, and commercial entities. Mortgage services are sold in 50 states, and auto financing is offered in 46 states. Small businesses have been a particular strong point in the company's recent financial press release. The bank provides a individualized level of service depending on a client's revenue.

Commercial banks typically make money by paying depositors a lower interest rate than they charge on the mortgages that they fund through their deposits. This becomes increasingly difficult in the current environment, in which short term interest rates are higher than long term interest rates.

Wealth Management

Wachovia provides financial advisory services to high-net-worth clients, families, and enterprises. The company also provides insurance services which include risk management, employee benefits, and corporate insurance plans.

Corporate & Investment Banking

Capital raising, mergers and acquisitions advisory services are among the specialties offered in this division. The firm specializes in advising private equity shops, hedge funds, and other firms in the financial services sector. The Corporate & Investment Bank also engages in investments in start-up firms, asset-based lending, as well as cash-holding services to its clients among other offerings.

Capital Management

Investment retirement plan and brokerage services are provided under this arm of the Wachovia Corporation. With offices in 47 states and in Latin America, the firm is poised to take advantage of its strong asset management team based in Evergreen Investments. The asset management team focuses on institutions, endowments, as well as advising pension funds.

Trends & Forces

The Market for Loans

Loan defaults, particularly in the subprime market have increased dramatically in recent months. As interest rates rose many borrowers find themselves at the mercy of their once low adjustable rate mortgages. Moreover, higher interest rates raise the cost of borrowing for all lenders, dampening overall demand for mortgages and other home loan products.

The Yield Curve

Typically banks charge higher interest rates on loans which qualify as long term debt than they they pay on deposits (short term debt). With the yield curve inverted, long-term rates are lower than short-term rates, making deposit accounts left profitable.

Geographic Coverage

Domestically, Wachovia has a strong presence on the east coast, and with the recent acquisitions on the west coast, it will enter California, Arizona, Nevada, Colorado, and Texas.

The firm has made strong progress in entering the Latin American markets which has seen very strong growth in the real Gross Domestic Product in the past couple of years.

Corporate Developments

Mobile Banking: Banks across the industry have made progress into mobile banking issues. In 2006, the major banks including J P Morgan Chase (JPM), Citigroup, and Commerz Bank launched a campaign to open as many ATMs as possible. The idea of convenience is extended to a new level by phone-based mobile banking. Basic services like account management and fund transfers are among the possible options for mobile banking. Most importantly, it represents an outlet for those lacking bank accounts, are undocumented, and poor.

Remittances: With Bank of America (BAC) taking the first move into the remittances market, competitors and start-ups are taking small steps into the industry. At present, this segment represents a significant source of untapped revenue with very little competition.

Competitive Landscape (2006)

The major players in Wachovia's league are Citigroup (C), Bank of America (BAC), and SunTrust Banks (STI) These firms typically operate in a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets."

	Domestic Deposit Market Share (%)
	1Q08	2007	2006	2005	2004
Bank of America (BAC)	8.21	10	9.54	10.36	10.07
J P Morgan Chase (JPM)	6.23	7.4	7.49	7.07	4.18
Wachovia (WB)	4.9	6.1	6.21	6.16	4.55
Wells Fargo (WFC)	3.56	4.2	5.20	4.69	4.90

^[3]

References

1. ↑ Citigroup Girds for Takeover Battle with Wells Fargo
2. ↑ PR Inside "Fitch: Wells Fargo Cements National Franchise with Wachovia Buy; IDR Affirmed at 'AA'" 9 Feb 2009
3. ↑ Calculated using each firm's domestic deposits as a share of total domestic deposits from FDIC ID Key Statistics (as of March 31, 2008)

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