Wells Fargo profit surges; CEO prepares for Citibank

Tuesday, July 16, 2002 | 11:14 a.m.

SUN STAFF AND WIRE REPORTS

SAN FRANCISCO -- Wells Fargo & Co. Chief Executive Richard Kovacevich is getting a new neighbor: Sanford Weill.

Citigroup Inc.'s chief executive said in May he's buying San Francisco-based Golden State Bancorp Inc. for $5.8 billion, expanding in California and Nevada consumer banking with Golden State's California Federal Bank.

For Kovacevich, the biggest financial services company's larger presence may hamper plans to sell more mortgages, mutual funds and credit cards to his 20 million customers, some investors said.

"Wells Fargo will have another big-time competitor," said Wayne Bopp, a Cincinnati-based analyst at Fifth Third Investment Advisors, which manages $30 billion, including both Wells Fargo and Citigroup shares. "Citi has all the products of a big bank that Golden State doesn't have now."

Wells already is battling to remain the No. 1 U.S. mortgage originator and is fending off Bank of America Corp. and Washington Mutual Inc. in its home state. California is the biggest U.S. banking market, with $496 billion in deposits, according to the Federal Deposit Insurance Corp. Wells and Citigroup's Citibank both have plans to capture more business from the state's large Hispanic population.

Wells, the largest bank in Nevada, said today it earned $1.42 billion or 82 cents per share in the second quarter, both up 17 percent from the year-ago quarter, as lending increased.

The 150-year-old company avoided large losses suffered by rivals such as J.P. Morgan Chase & Co. and Citigroup related to Argentina's debt default and currency devaluation and to Enron Corp.'s collapse. Wells reduced fourth-quarter 2001 earnings by $28 million on those events, while Citigroup and J.P. Morgan Chase lost billions.

Shares of Wells Fargo rose 1.3 percent in the second quarter compared with the 7.6 percent decline in the 24-member Philadelphia KBW banks index. Wells is the second-best performing stock in the index behind Charlotte-based Wachovia Corp., another bank that's been concentrating on its consumer business.

Kovacevich, who declined requests for an interview for this story, was paid $3.8 million last year in salary, bonus and other compensation. The company granted him stock options that could be worth $75 million in 10 years, assuming the shares rise 10 percent each year.

The 58-year-old executive left Citigroup Inc. in 1986 as one of nine group presidents, and became chief executive of Minneapolis-based Norwest Corp. in 1993. He has been running Wells Fargo since Norwest acquired it four years ago and adopted the California bank's name and moved its headquarters to San Francisco.

Golden State, the nation's third-largest thrift by assets, focuses on gathering deposits and making home loans. Golden State today reported a second-quarter profit of $85.3 million or 59 cents per share after charges, down from $104.2 million or 72 cents in the year-ago quarter.

New York-based Citigroup plans to use its 352 West Coast California Federal branches to sell more credit cards, mutual funds and insurance. The purchase will increase Citigroup's total U.S. branches to 797.

Carrie Tolstedt, who worked for Kovacevich at Norwest and now oversees Wells Fargo's 850 branches in California, downplayed the acquisition's significance. "There's no question Citi will have increased distribution in California, but the fact remains we are in a very competitive industry and are used to going head to head," she said. "We will certainly have a competitive response."

Tolstedt, 42, wouldn't be specific. Analysts said the company may offer promotions on deposits and lending, and try to hire Golden State employees who can bring along customers.

Kovacevich guided the company to a five-year average gain in profit of 9 percent through last year, according to Bloomberg data.

He has focused on mortgage and home-equity lending as interest rates stayed near 40-year lows. Wells had more than $100 billion in new home loans through May and arranged $194.4 billion in new mortgages last year. Washington Mutual, its biggest mortgage competitor, generated, $166 billion in new mortgages in 2001.

"You have to keep in mind how strong of a hold Wells and Bank of America have" on California customers when considering Citigroup's prospects, said Steve Schroll, a financial services analyst at American Express Financial Advisors in Minneapolis, which manages $100 billion in equities including Wells Fargo and Citigroup.

Wells Fargo is packaging products to get customers to take up to eight bank services, up from an average of about four now. For example, the "Advantage Pack" includes an interest-bearing bearing checking account with free checks, a Wells Visa credit card, an automated teller machine and check card, a savings account and a personal line of credit.

Bank customers typically have 2.7 products per household, according to data from Boston-based Dove Consulting.

Both Wells and Citigroup also are focusing on Hispanic clients, which account for about a third of California's population, according to U.S. Census Bureau figures.

In November, Wells became the largest U.S. bank to begin accepting Mexican-government issued consulate identification cards, allowing undocumented Mexicans to open bank accounts.

Citigroup started accepting the cards a few months later. Its purchase last year of Grupo Financiero Banamex SA, Mexico's second-largest bank, helps it sell more to the same clients because of services like low-cost money transfers to Mexico.

"Citi is really going to be attacking the consumer market all around, but they'll probably be going at each other head to head for (Hispanic) customers," said John Kline, an analyst at Sandler O'Neill & Partners.

Bloomberg News contributed to this report.