Wells Fargo-Wachovia

Objective: To expand Wells Fargo's community banking operations on the East Coast and create a powerful investment banking division.

Impact: Net income has, unsurprisingly, climbed across all of divisions since Wells has become two large banks instead of one. But through the Wachovia merger, Wells has expanded its retail banking franchise into 15 additional states where it lacked a presence, as well as Washington, D.C. It now has about $760 billion in core deposits, or 2.4 times the $321 billion it had a year ago, before the acquisition. Wachovia's herd of 21,500 financial advisors is also driving growth across several business platforms, especially mortgages.

Although the Wells-Wachovia franchise doesn't rank high in investment banking league tables -- neither firm ever did -- the combined business has many synergies that Wells is capitalizing upon.

For instance, Wells hasn't been lending to its large cache of corporate and commercial clients as much. But Wachovia has been able to tap the debt and equities markets for them and offer advisory services, thereby increasing fee income. The same applies for the many local and state governments with whom Wells has long-term business relationships. CFO Howard Atkins calls these synergies "a great example of how having a diversified model provides revenue in all environments."



However, Wells' asset quality has deteriorated significantly in the wake of the deal. Its nonperforming assets now comprise 2.93% of the bank's loan book, far above its 1.53% year-ago level. The bank has set aside $24.5 billion to cover near-term loan losses, more than triple $8 billion a year ago.

The corrosion is in part because of the imposition of Wachovia's bad loans, but Wells wrote them down so far at the time of purchase that they are actually performing better than initially anticipated. Therefore, although worries lingered about Wachovia's toxic assets, it's now Wells own, better-underwritten legacy loans that are causing problems, as the economic downturn has worked its way out into prime borrowers.

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