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Wells expands in investment banking as others retreat

A Wells Fargo sign is seen outside a banking branch in New York July 13, 2012. REUTERS/Shannon Stapleton
A Wells Fargo sign is seen outside a banking branch in New York July 13, 2012. REUTERS/Shannon Stapleton

By Rick Rothacker

CHARLOTTE, North Carolina (Reuters) - As banks across Wall Street retreat from the trading business, Wells Fargo & Co is expanding.

The growth worries some investors who want the notoriously conservative bank to stick to its knitting, but Wells Fargo believes that now is a good time to hire.

"Our eyes are wide open," said John Shrewsberry, head of the bank's investment banking and capital markets operations, known as Wells Fargo Securities.

"There are a lot of very talented people at different stages of availability," he added in an interview this week.

The fourth-largest U.S. bank says it can earn solid returns in investment banking while taking little risk for itself. It is focusing on services that its corporate lending customers need, such as stock and bond underwriting and merger advice. For investors, it is looking at areas like processing futures and swaps trades. The bank shies away from riskier undertakings like trading for its own account.

The Wells Fargo Securities unit is relatively small now. It's biggest hub is in Charlotte, North Carolina, far from the storm that has hobbled Wall Street this week.

In a few years, the unit could account for twice as much of the firm's revenue as it does now - an estimated 10 percent compared to its current five, Deutsche Bank analyst Matt O'Connor wrote in a report in May. For JPMorgan Chase & Co, , Bank of America Corp and Citigroup that percentage is closer to 20 to 25 percent.

A much bigger proportion of Wells Fargo's revenue comes from traditional commercial and retail banking businesses: residential mortgages, lines of credit for corporations, and so on.

Expanding into what is a relatively new area for the bank is worrisome for some investors, said veteran bank analyst Dick Bove of Rochdale Securities.

"They're saying that's not your business. Therefore, you're going to make mistakes. It's going to cost us a lot of money," Bove said.

At a bank presentation for investors in May, Wells Fargo CEO John Stumpf faced questions about why the bank needs to be in the business and whether it risks changing the company's identity. Stumpf said the move was consistent with the bank's strategy to provide more products and services to its customers.

ROOM TO GROW

The bank has no specific targets for hiring, Shrewsberry said. The securities unit has a little more than 4,000 employees now, less than 2 percent of the company's total.

The unit has left itself with room to grow. In Charlotte, Wells is putting the finishing touches on a new trading floor, which has empty space where more desks can be added.

The location came to Wells Fargo in 2008, when it acquired failing Wachovia on the cheap, picking up a mid-sized investment bank in the process.

Wachovia was in the process of building a new headquarters in its hometown of Charlotte, when it was bought. The building was completed and is now known as the Duke Energy Center, but Wells did not decide to build the trading floor until last year.

About 1,500 traders, bankers and support staff will start moving into the building from a nearby location in December. If traders need a reminder of the competition, they can glance out the window at the city's pro football stadium, named for Charlotte-based Bank of America.

Shrewsberry, 47, has been leading the combined business since the Wachovia merger. He joined Wells in 2001 when it bought the firm he co-founded, American Commercial Capital, which lent money to restaurant franchises. Before that, he worked at Goldman Sachs Group Inc and Credit Suisse .

One growth area is a futures clearing and execution business, which the bank is expanding as it builds out a swaps clearing business required by new regulations, Shrewsberry said.

Wells in April also agreed to buy Merlin Securities LLC in its foray into the business of providing trading, reporting and other services to hedge funds. The business, to be renamed Wells Fargo Prime Services, currently doesn't lend to hedge funds, but Wells plans to add that capability, Shrewsberry said.

The bank's presence outside New York was helpful this week when Hurricane Sandy snarled the Northeast, closing U.S. markets for two days and shutting down New York offices for Wells and other banks.

"Luckily we can shift a lot of activity to Charlotte," Shrewsberry said. "We can shift activity to San Francisco. We have sales offices all around the country and the world for that matter that can pick up slack."

(Reporting By Rick Rothacker in Charlotte, N.C.; editing by Andrew Hay)

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