Adds a response from a JPMorgan spokeswoman in 14th paragraph.NEW YORK ( TheStreet)-- Wells Fargo ( WFC) is quietly sneaking its way into the deal making and trading businesses, showing impressive growth amid the struggles of industry leaders like Goldman Sachs ( GS)and JPMorgan Chase ( JPM) Loan syndication at Wells Fargo jumped 72% from the first quarter to the third quarter of this year, while rising just 4% industry-wide, according to a report by JPMorgan analyst Vivek Juneja. Wells Fargo only discloses trading gains while keeping quiet on revenues, but Juneja estimates trading revenues of $700-$900 million per quarter in the first two quarters of 2011.
Wells Fargo's stock trades at a substantial valuation premium to those institutions (see chart below). There is some disagreement about the reason for Wells' higher price. Sloan argues business diversification is an important part of the equation.
"We've got a lot of businesses. None in particular is so great or so large that it creates a lot of volatility in our earnings stream. When you look at our loan portfolio, it's about 50/50--well maybe 55/45--consumer to wholesale. You look at how we generate income and it's about 50/50 between loan spread and securities spread and fees. You look at our fee income and it's very diversified across different fee types. That's why I think we are viewed as trading at a premium versus others," Sloan says. There are other possible explanations. The fact that Wells Fargo has less exposure to Europe than the other big U.S. banks is clearly part of the equation. Another factor, contends Gary Townsend, principal at financial services focused hedge fund Hill Townsend Capital LLC, is that Wells is less exposed to mortgage-related liability than either JPMorgan or Bank of America. That's because many of the troubled mortgages Wells acquired come from Golden West Financial Corp., which Wachovia bought for $25 billion in 2006. "Golden West didn't do a lot of securitization, so most of those mortgages are held in portfolio rather than by investors or Freddie Mac ( FMCC.OB)or Fannie Mae ( FNMA.OB)," says Townsend. Rochdale Securities analyst Richard Bove attributes Wells' higher valuation to steady double-digit earnings growth. As long as the company can keep that up, Bove doesn't think it matters which businesses it comes from. "You can go back 20-25 years and there are very few times when Wells couldn't show a 10% plus growth in earnings. You can't do that for JPMorgan. JPMorgan has a highly cyclical earnings record and even though they did a phenomenal job coming through the crisis it's still a highly cyclical earnings record," Bove says. (A JPMorgan spokeswoman declined to comment.) Wells CFO Sloan argues there is no reason investment banking and capital markets need to be riskier than commercial and consumer banking. "I don't view this as any bit different from when the commercial mortgage backed securities market got crazy in 2007 and we started to put our pencils down because we just weren't going to originate some of those loans. When the residential mortgage business got crazy in 2006-7 and there were all sorts of option ARMs and low down payment loans and all that kind of stuff we didn't do that," he says.
Even if investors don't buy this argument from the company, it is likely to be some time before they start to worry, according to Christopher Kotowski, analyst at Oppenheimer. Kotowski wrote via e-mail that Wells' capital markets business "can grow a whole lot and still be a rounding error for quite a few years. If it gets big enough to be a factor for the multiple that would be a high class problem," he says. -- Written by Dan Freed in New York. Follow this writer on Twitter.