Wells Fargo will downsize Wachovia's investment bank

Wells Fargo & Co. executives signaled Wednesday that the bank will downsize Wachovia Corp.'s corporate and investment bank after the companies' planned merger later this year.

In a conference call with analysts, Wells Fargo chief financial officer Howard Atkins said there were a “number of businesses in the mix we will look to downsize to a certain extent,” naming the “higher risk” and “more transactional” aspects of investment banking. The San Francisco-based bank also plans to shed Charlotte-based Wachovia's troubled $118 billion Pick-A-Payment mortgage portfolio.

Wells last month agreed to buy faltering Wachovia in a deal initially valued at $15.1 billion. The merger is expected to close Dec. 31 after a Wachovia shareholder meeting earlier that month, Wells said.

Wachovia's corporate and investment bank employs about 5,700 worldwide and is a source of high-paying jobs in Charlotte, where the business is based. Since the credit crunch began last year, the unit has suffered billions in losses on mortgage-related investments and has cut hundreds of jobs as business has dried up.

Wells held the unscheduled conference call after announcing plans to raise $10 billion in capital through a public stock offering. It had previously said it would raise up to $20 billion as part of the Wachovia deal, but it has since received an injection of $25 billion as part of a federal government program.

Atkins said Wells could exceed previous plans to cut $5 billion in expenses from the combined company. The bank hasn't said how many jobs will be cut but has said it will work to retrain employees for other positions if possible. Wachovia has 20,000 employees in the Charlotte area.

Wells has previously said it would look at all of Wachovia's businesses to decide which to keep or cut but has provided few specifics. Spokespersons for Wells Fargo and Wachovia declined comment.

Wells has previously only dabbled in the investment banking business, eschewing higher risk trading and the creation of complex mortgage-related securities for investors. That approach to the business had already raised concerns among Wachovia bankers worried about the unit's future.

In an investor presentation Wednesday, Wells said it will “conform” Wachovia's investment bank to Wells Fargo's model, which focuses on services directly needed by corporate customers such as merger advice, bond underwriting and the arrangement of real estate transactions. Wells said it will reduce large corporate, commercial real estate and structured products, areas that Wachovia has already been downsizing.

Wells prefers more stable retail banking to investment banking, said Dick Bove, an analyst at Ladenburg Thalmann & Co. And virtually no firms, he said, are interested in expanding their investment banking units, as demand for functions such as advising companies on initial public offerings has evaporated in a souring economy.

“If there isn't any business, it doesn't make sense to have a large investment banking division,” Bove said.

Overall, Wells expects $60 billion in losses on $482.4 billion in Wachovia loans over their lifetime, from consumer to commercial loans. It will take $39 billion of that as an accounting charge at the close of the deal. In the Pick-A-Pay mortgage loan book, Wells expects losses of 29 percent, or $36 billion, up from Wachovia's estimate last month of 22 percent, or $26 billion.

Wachovia has already stopped making Pick-A-Payment mortgages, which it inherited from its 2006 Golden West Financial Corp. acquisition. Like Wachovia, Wells said it will look to refinance existing customers into Federal Housing Administration loans. Wells didn't make the loans, which have been a big source of losses for Wachovia as housing prices have collapsed.

While the conference call foreshadowed future cuts, executives also praised many of Wachovia's businesses and noted opportunities to sell more products to the bank's customers. The presentations highlighted business such as mutual funds and brokerage, while also noting opportunities to consolidate in some areas. In particular, Wells pegged the wealth management business for expansion.

“This is not a fixer-upper in the traditional sense,” Wells chief executive John Stumpf said. “This is a wonderful franchise.”

Wells said it expects the deal to add to earnings per share by 20 percent after the third-year. Atkins admitted that was a high number for a bank merger, but noted the efforts to remove risks from the transaction.