SAN FRANCISCO - It has long been assumed that in a capitalist country, the way to get rich is to accumulate and invest capital.
But Wells Fargo & Co. is turning that notion on its head. The $52.3 billion-asset institution, based here, has been prospering by unabashedly turning itself into the incredible shrinking bank.
Through stock buybacks, business-line exits, and reductions in loan-loss reserves, it has boosted earnings per share and returns on assets and equity, much to the delight of investors and stock analysts.
"Wells Fargo is still the best story we've got," said Bear, Stearns & Co. analyst Lawrence R. Vitale, who continues to rate the stock a "buy," as he has for more than two years, even though its recent price of $184 per share is near its all-time high.
The enthusiasm for Wells' shrinking act is a marked change from investor attitudes of two years ago, when the winners, in investors' minds, were institutions that made acquisitions.
The reason for the change, analysts say, is that acquisitions are getting too expensive, while lending continues to be a slow-growth and risky business, with declining margins.
"At this point in the cycle, perhaps the best use of capital is to return it to shareholders," said Alison A. Deans, a securities analyst with Smith Barney Inc. in New York.
In a recent report, Ms. Deans and an associate named Wells among the five big banks doing the best jobs of returning capital to shareholders. The others on the list were First Interstate Bancorp, First Bank System Inc., National City Corp., and SunTrust Banks Inc.
But in an interview, Ms. Deans said Wells was "by far the furthest ahead."
The report expressed hope that other big banks - including BankAmerica Corp. and Citicorp - will follow suit, .
Perhaps the most visible way in which Wells has been shrinking has been by buying back its stock. In 1994, for example, Wells Fargo bought a total of 9% of its common stock. In April, its board approved repurchases of another 10%.
"We plan to continue purchasing stock until market conditions change and we can find investment opportunities that provide the returns you have come to expect from us," chairman Paul Hazen and president William Zuendt wrote in a letter to shareholders in the 1994 annual report.
But Wells has been shrinking in other ways, too. It is reducing its overfunded loan loss reserves by suspending provisions. Dividends were raised 15% this year.
Wells also is exiting business lines that are said to not be profitable enough, including the origination of residential mortgages.
As a result, in the first quarter, Wells' total assets declined 1.97%, to $52.2 billion, as loans fell $715 million, to $32.7 billion. Meanwhile, revenues declined 4%, to $907 million.
Revenue growth isn't expected to pick up substantially anytime soon. CS First Boston predicts that Wells will have slower "normalized" revenue growth than any of its peer banks in the next two years, with a compound annual increase of 1.1%.
But far from damaging the bank, this retreat is making it look healthier. In the first quarter, Wells Fargo's net income rose 15% to $233 million. Earnings per share did even better, growing 29% to $4.41, because the stock buybacks reduced the number of shares outstanding. Analysts said the stock buybacks are the principal reason that Wells Fargo's return on equity rose to the lofty 26.89% in the first quarter.
Wells Fargo's management has been forthright about acknowledging that it has benefited from balance sheet management, rather than business growth.
In a speech at the annual shareholders meeting, Mr. Zuendt attributed three-quarters of Wells Fargo's earnings per share growth in 1994 to reductions in loan loss provisions, and only 4% to core business growth.
In the first quarter, two-thirds of the growth in earnings per share came from stock buybacks and reductions in loan loss provisions, he added.
But even though the shrinkage has been well received, Wells officials and bank analysts acknowledge that it can't continue forever. Indeed, Mr. Zuendt said at the shareholder meeting that revenue growth is now Wells' "main challenge."
He didn't elaborate on where the growth will come from. But analysts point to Wells' alternative banking services as one potential source, especially its aggressive efforts to open branches in supermarkets. Wells now operates about 160 full-service and single-person supermarket branches, over 2 1/2 times the number it had at the beginning of the year.
Mr. Vitale expects this and other measures to get revenues growing again in 1997. Meanwhile, he expects the bank to continue to be a leader.
"Wells has been educating the industry," he said.