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We Called It: Wells Fargo's Securities Foray

Stocks in this article: WFC BAC PFE

The decision to maintain and expand investment banking capability has already begun to boost revenue. The markets have eased, firms have been issuing hundreds of billions of dollars worth of new stock and bonds, and Pfizer's (PFE) deal for Wyeth (WYE) in January was the first signal that M&A market was kicking off again. It was soon followed by a $46 billion deal for Genentech by - Roche, Oracle's (ORCL) $7.1 billion purchase of Sun Microsystems (JAVA) and Merck's (MRK) $41.1 billion deal for Schering-Plough (SGP).

Meanwhile, an opportunity emerged in the financial tumult of the past year. Lehman Brothers is gone, Bear Stearns is wrapped into JPMorgan, Merrill Lynch faces difficulties at Bank of America (BAC) and Goldman and Morgan Stanley (MS) face their own individual hurdles.

Wells began to reap the benefits of the situation during the first quarter. Wachovia contributed 41% of the firm's combined revenues, over 40% of net interest income and 43% of noninterest income, with strong contributions from trust and investment fees, and trading. Those two activities resulted in $2.2 billion in income, compared with $802 million at legacy Wells.

Few question Wells' track record in terms of ample risk-management, its successful integration of Norwest after a complex merger, and its managerial prowess throughout the crisis and beyond. For those reasons, some argue that Wells would be remiss to ignore the opportunity in investment banking.

"There's a lot fewer players in that market than there used to be," says Joe Keetle, a senior wealth manager at Dawson Wealth Management, a financial-services firm in Cleveland. "It doesn't surprise me that Wells would try to expand into that type of business because ... it has a very strong brokerage division with the acquisition. And with things going forward -- IPOs and such -- they're going to want some exposure in that area as well."

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