Ever since the U.S. financial crisis forced the nation's biggest lenders to get billion-dollar bailouts from the Treasury Department and Federal Reserve, officials have pushed banks to rein in risk.
But one of the biggest U.S. lenders, Wells Fargo (WFC) , wasn't nearly as risky as peers -- at least in terms of a key financial ratio monitored by regulators. That's one reason the San Francisco-based bank has been able to push deeper into a core Wall Street specialty where other players have scaled back: repo, or the business of lending to traders to help them juice returns on bond bets.
Wells Fargo has nearly tripled its repo loans since 2013 to $67.4 billion as of Sept. 30, filings show. Competitors JPMorgan Chase (JPM) , Citigroup (C) , Goldman Sachs (GS) and Morgan Stanley (MS) have trimmed their repo books over the same period, in amounts ranging from 5% to 14%.
The recent scandal over improper sales practices in Wells Fargo's retail-banking unit has overshadowed the lender's healthier financial standing -- and lower risk -- compared with rivals. Using the most basic measure of a bank's financial strength, Wells Fargo has $7.70 of equity for every $100 of assets. At JPMorgan, the figure is $6.60 and at Morgan Stanley, it's $6.20. The regulatory minimum for big U.S. lenders is $5.
And while industry overseers want banks to have more equity, to make them safer, many shareholders still want the firms to take as much risk as they can, to maximize returns. That's why few analysts expect new CEO Tim Sloan, appointed following the departure last month of John Stumpf, to turn away from his goal of grabbing market share from longstanding Wall Street titans.
"They're able to enter businesses that for others are more capital-constrained," said Gerard Cassidy, an analyst at RBC Capital Markets. "What might not be as profitable for a New York City money-center bank because of these extra capital levels that are required, Wells may find it more profitable."
Repo lending fits the bill. It's considered a low-margin business, returning an estimated 3% on equity versus a target of at least 10% for banks on average. But it's still often called the "lifeblood of Wall Street," since financing is such a basic need for so many bond investors.
Wells Fargo has pushed into the arena as part of its efforts in 2012 and 2013 to expand in mortgage-bond trading and, earlier this year, into U.S. Treasuries, according to Elise Wilkinson, a bank spokeswoman.
"We do not run repo as a standalone business," she said in an e-mail. "It exists to meet the needs of our investor clients."