Why Wachovia Is a Good Fit For Wells Fargo

Wells Fargo's now-on, $12.2 billion takeover of Wachovia is a positive for the San Francisco-based bank since it doubles its balance sheet, its branches and makes it a coast-to-coast entity, bank analysts say.

Taking over the North Carolina bank gives Wells Fargo first-time access to 13 eastern states in addition to the six Western and Midwestern states where both banks have a presence, including California. In addition, Wells has its own branches in 16 more Western and Midwestern states.

With Wachovia, Wells will gain coast-to-coast retail access covering just about every major market in the U.S., including new ones such as New York, Philadelphia, Washington, D.C., Charlotte, N.C, Atlanta and Miami.

The two banks are fairly well matched. Wells has $609 billion in assets and 28 million customers compared to $812 billion in assets and 20 million customers for Wachovia. Wells has $339 billion in deposits and 160,000 employees compared to $443 billion in deposits and 120,000 employees for Wachovia.

As part of the deal, Wells Fargo will pick up brokerage Wachovia Securities which just a year ago bought A.G. Edwards based in St. Louis. Wells will remain in California but will base its eastern U.S. operations in Charlotte, N.C., also home to newly emerged financial behemoth Bank of America which has bought Countrywide Financial and Merrill Lynch.

To be sure, there are matters to sort out for Wells. Up until now, Wells has pretty much avoided the mortgage-related debt mess that brought on the frantic financial crisis. Still, the firm has taken a $1.4 billion loss on bad home quity loans and while still making money, its profits have been shrinking in the past nine months.

Wells must deal with Wachovia's giant misstep in 2006 when it bought California lender Golden West Financial and inherited a mountain of bad mortgage debt. Indeed, the usually astute Wells will be exposing itself in a big way to Wachovia's mortgage debts.

Wachovia underwent a major run on its bank deposits on Sept. 26. The bank lost $5 billion leading regulators to tell bank officials Wachovia might be shut down if it didn't find a suitor. Wachovia was still loosing deposits on Sept. 29 when CitiGroup agreed to buy part of it. Its deposits had been $448 billion.

On the bright side, Wells Fargo will deal with a $74 billion, Wachovia-related writedown that will be eased by tax deductions just recently allowed by the Internal Revenue Service. It will also sell more of its stock to ease the pain. Despite its own stresses with financial bad times, Wells has a good record with integrating mergers, according to Fitch Ratings, which affords Wells' an AA Issuer Default Rating.
The Wells deal looks a lot better than the failed takeover attempt by CitiGroup for Wachovia's banking operations. As part of that deal, the Federal Deposit Insurance Corporation had agreed to absorb up to $42 billion in losses should Wachovia's loans turn bad. The Wells deal doesn't require any federal government help.

Rolling the dice for Wachovia could have big payoffs for Wells Fargo, which has been long painted in television and movie westerns as a cultural icon. There are big risks, but a smooth integration could suddenly boost Wells Fargo into the leagues of national, coast-to-coast players on the order of Bank of America and JPMorgan. So far, that goal has been elusive for 156 years.