Wells Fargo CFO Played Important Role During Economic Downturn

The cover story of the current issue of CFO Magazine features the Role of Bank CFOs in the recent economic downturn. The excerpt below features Howard Atkins from Wells Fargo:

Wells Fargo knows a thing or two about how to survive a crisis; after all, it had to endure the California Panic of 1855, when the company's mission was to carry gold and freight between the mining regions of the West and the financial centers of the East. Thanks in part to a wagon-load of TARP funding, it appears ready to emerge from this most recent crisis, having reported revenue of $88.7 billion for 2009 and net income of $12.3 billion.

CFO Howard Atkins is a survivor as well, having outlasted the finance chiefs at the nation's other largest banks. Atkins attributes both his and the bank's success to the fact that Wells Fargo stuck to its business model and stayed out of activities that entangled other large banks. It was also helped by the capital position it enjoyed as the crisis began two years ago. Early last decade, many banks issued hybrid securities — instruments that combine elements of debt and equity — to buy back their common stock. "We never really thought that was a smart thing to do," Atkins says. "It may have helped earnings per share in the near term, but it weakened the banks' capital structures." The Basel Committee on Banking Supervision has come around to that view and plans to phase out the acceptance of hybrids in banks' Tier 1 capital calculations and make retained earnings and common equity more prominent.

Sponsor: Cambridge Consulting Group has provided cost containment and branch real estate strategies for major financial institutions such as Bank Of America and Key Corp. These programs have saved these firms millions of dollars in underutilized capital and real estate. For more information please visit their website at www.commercialleaseterminations.com.

Wells Fargo Assets

Wells Fargo hardly stayed above the fray, however, largely due to its all-stock acquisition of Wachovia Corp. for $12.5 billion. The move caused many experts to scratch their heads, given Wachovia's high-risk loan book. But Atkins is unwavering in claiming it was the right decision. Despite Wachovia's weaknesses (which were compounded by its acquisition of a large California mortgage lender right before the housing market peaked), "we looked through its problems and found an affluent customer base that represented a huge cross-selling opportunity," Atkins says.

Fixing the Hole

Nonetheless, as it struggled to absorb the acquisition, Wells Fargo saw its Tier 1 capital ratio fall 75 basis points, to 7.9%. After stress tests conducted by the Federal Reserve last May, Wells was told to raise $13.7 billion, despite already having received $25 billion through the TARP program. The bank launched a series of massive follow-on stock offerings, raising $33.5 billion in 13 months. "We got it done in a short period of time with a lot of pressure in the marketplace," Atkins said. As a result, the bank was able to repay its TARP infusion, with interest. "TARP served its purpose, and we returned a billion and a half dollars to the taxpayer," Atkins says.

Atkins is glad to have thrown off the TARP, in part because he can now turn to other matters, such as how a rise in interest rates will affect Wells Fargo's investment portfolio. To match its assets to liabilities, Wells typically buys long-duration mortgage-backed securities, but term interest rates are still at historic lows. "Even though we have a growing base of deposits, we are intentionally underinvesting to avoid the risk that rates go up and we have to take a loss," Atkins says.

The bank may face new regulatory pressure as well: it boasts a 10.8% deposit market share nationally (about the highest in the United States) and above the 10% limit created by the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994. If regulators decide to address the "too big" aspect of "too big to fail," Wells Fargo will definitely appear on their radar screen.

However, in a community-banking climate in which there are fewer competitors and credit pricing is more rational, Wells Fargo's customer focus will serve it well, says Atkins. "A lot of banks got into trouble when they drifted away from focusing on doing the right thing for customers," he says. "We never drifted."

For the complete article please click here