Wells Fargo's Risks 'Lower Than Our Peers',' Execs Say

Wells Fargo (WFC) executives touted the company's corporate lending, investment banking, and risk management functions on Tuesday afternoon, assuring investors and analysts that the bank's priority on customer relationships over trading would keep it safe.

Wells officials delivered the presentations during the bank's investor day in New York, a biannual roadshow of the company's various divisions. The tone was largely congratulatory, and mirrored Wells' often repeated assertion that it is the only one of the country's largest banks that restricts its risk-taking to core operations.

"I would say our risk profile is lower than our other large bank peers," said Mike Loughlin, the bank's chief risk officer.  "I'd also like to point out that we did this in the most difficult regulatory and legislative environment anyone can recall" and during the bank's merger with Wachovia.

"We take risk we can understand, we take risk we can manage, and we take risk appropriately for where we can price return," said David Hoyt, the head of wholesale banking, which includes Wells Fargo's corporate lending, investment banking, and capital markets functions.

Executives said the bank had substantially improved its risk management since the last investor day.

"We are out of a lot of activities that we don't need to be in and don't want to be in," Loughlin said, in an apparent reference to Chief Financial Officer Tim Sloan's statement on Tuesday morning that the bank had drastically reduced its exposure to credit default swaps. Similar swaps played a role in JPMorgan Chase's (JPM) recently announced multi-billion dollar loss.

"Three years ago our credit default swaps [were] much too large, and it is now about a quarter of what it was three years ago," Sloan said.

Other changes in Wells' operations include its consolidation of counterparty risk onto one system internally and the bank's decision to move its market risk management operation out of the bank's treasury division, which engages in risk taking.

"We moved that into my world to make it more independent," Loughlin said.

As evidence of the bank's relatively low risk profile compared to peers, the executives cited the bank's low daily Value at Risk, which is just over $30 million. VaR is a metric of how much the bank would be likely to lose on its trading positions in the event of an unusually bad, but not catastrophic, day. But Loughlin hastened to say that the statistic was not central to the bank's risk-taking decisions.

"When our market risk [staff] walks the trading floors, I think maybe that's a better risk management tool than VaR," he said. "We have appropriate desk limits, and we have good escalation procedures."

Questions at the event were generally deferential, though two audience members queried executives about the growth of the bank's capital markets and overseas trading.

Bank executives defended the growth as essential to meeting customer demand and fairly low risk.

"There are a lot of businesses we have in the context of wholesale [lending] that are risk businesses," said Hoyt. But the company's risks in investment banking advisory work and international banking "wouldn't be at the top of my list of places where we're taking the most risk," he said.

One area in which Hoyt said the bank would be careful was commercial real estate, he said. While the pricing of CRE lending was still fairly good, it's "one of the areas where we've seen a deterioration in terms of structure," he said, referring to the easing of covenants in loans.

The least disciplined competition has been "at the lower end of the market … from our regional competitors," Hoyt said.

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