Even though over the short term it will cost the company some profits, Wells Fargo (NYSE:WFC) has started lowering its exposure to fixed-income investments in anticipation of interest rates increasing.
To underscore the commitment, the company lost as much as $1 billion in 2009 as a result of their policy, and continues to hold to their strategy in spite of the Federal Reserve asserting they’re not going to raise interest rates for some time to come.
As far as the numbers go, Wells Fargo in just the second half of 2009 cut back on their overall investments by $34 billion, with the bulk of that fixed-income securities.
So what Wells Fargo is doing is managing its risk by cutting back on the overnight borrowing for the purpose of reinvesting in higher-yielding securities, because they could get burned badly if the interest rates go up and they’re stuck with the investments.
Major American banking competitors Bank of America, JPMorgan Chase and Citigroup are basically ignoring the risk, as they’ve increased their investments by an average of $35.5 billion. These three banking giants are betting that their future profits will grow faster than any losses occurred from the possibility of interest rates rising.
Wells Fargo’s Chief Executive Officer John Stumpf said recently that the company doesn’t mind short term losses as they believe interest rates will rise and that cutting back on fixed-income investments is the better trade.
A number of analysts agree with Stumpf in that the other major banks could be far too complacent and may be caught off guard again when interest rates rise.
In hindsight it looks like Wells Fargo is making a mistake, as they lost close to $1.15 billion in pretax income from June to December 2009 because of lowering their exposure to fixed-income investments.
But over the long haul they have a much more predictable future, and the short-term pain will some day be exonerated as interest rates eat away at their competitors’ earnings.
As of the end of 2009, Wells Fargo had $172.7 billion in their investment portfolio, while Bank of America increased theirs to $301.6 billion and Citigroup grew theirs to $254.6 billion.
