What is next for Wells Fargo & Co.?

By all accounts, the San Francisco company took a hard look at Wachovia Corp.'s banking business, which regulators agreed Monday to sell to Citigroup Inc. It also reportedly eyed Washington Mutual Inc.'s retail banking operation, which went to JPMorgan Chase & Co. last week.

Now the $609 billion-asset Wells faces a starkly different competitive landscape than just a week ago, one where Citi and JPMorgan Chase are building national operations and Wells ranks a distant fourth in terms of branches and deposits, lagging the two New York companies and Bank of America Corp.

Wells has been adamant in the past about avoiding risky transactions, but Richard Kovacevich, its chairman, adopted a different tone this month at a conference in California. "Given the financial conditions today, I feel like a kid in a candy store," he was quoted as saying. "There is a lot out there today."

Frederick Cannon, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said Wells "had to be a contender" for the Wachovia deal if it wanted to compete nationally.

Joseph Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said Wells was probably keen to buy Wachovia's branches and deposits but may have been reluctant to absorb a loan portfolio that includes more than $120 billion of option adjustable-rate mortgages. Given its $34 billion tangible equity base, "it would have been a lot for them."

Mr. Cannon said he applauded Wells' management team "for showing discipline."

But Mr. Morford said he does not believe that Wells "has to be a national player" in the retail banking business. "They feel that they still have a lot of opportunity with their existing customers. At the end of the day, I don't think they have to do any deal."

Others say Wells may still be able to close the gap. They suggested several possible targets, including National City Corp., whose shares have been pummeled since Wamu's failure because of investor concern about its mortgage exposure and liquidity. (See related story.)

Wells has 3,327 branches and $310 billion of deposits. The deal for Wachovia would let Citi leapfrog Wells by both measures. Buying the $812 billion-asset Wachovia's banking operation would raise Citi's branch total to 4,300 and its U.S. deposit total above $600 billion. JPMorgan Chase and Wamu collectively have 5,400 branches and $911 billion of deposits. (B of A has 6,131 branches and more than $700 billion of deposits.)

Were Wells to acquire Nat City, the San Francisco company would have 4,800 branches and roughly $410 billion of deposits, according to regulatory filings. Such a purchase also would bring Wells into several adjoining markets and give it a toehold in Florida, though the new markets would include numerous slow-growth ones in the Midwest, some observers said. Unlike Wachovia and Wamu, Nat City does not have option ARMs.

"It would certainly come to mind, but it might also come down to how stable National City's deposit base is," Mr. Cannon said.

A Nat City spokeswoman said that it is suffering from "a significant amount of irrational speculation and undue concern," and that it has "more than sufficient capital and liquidity to manage through these challenging times as an independent institution."

Comparisons to Wachovia and Wamu are "wholly inappropriate," she said.

Gary Townsend, the president of Hill-Townsend Capital LLC, said Wells could consider a large regional banking company in the Southeast. Wall Street continues to debate the overall staying power of SunTrust Banks Inc. in Atlanta and Regions Financial Corp. in Birmingham, Ala., though neither has shown obvious signs of liquidity issues.

"I don't think that Regions would be quite as attractive to them as SunTrust," Mr. Townsend said Monday.

Buying $177 billion-asset SunTrust would raise Wells' branch total above 5,000 and its deposit total to $411 billion, according to regulatory filings. Buying the $144 billion-asset Regions would raise Wells' branch total to 5,227 and its deposit total to nearly $400 billion.

Spokesmen for Regions and SunTrust would not discuss the speculation.

Analysts said a third option would involve buying a number of small regional banking companies with capital or liquidity issues. Wells has been much more willing than other large banking companies to pursue small acquisitions rather than taking a big bite, they said.

Mr. Morford sees another option, with Wells opting against a major purchase and instead looking to capitalize on the distractions B of A, JPMorgan Chase, and Citi would face integrating their purchases. "Wachovia may have been a pretty unique opportunity," he said.

A spokeswoman for Wells said Monday that she would not comment.

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