Wells Fargo (NYSE:WFC) seeks to double its asset management business in coming years – a move we see as a logical step for the bank which demonstrated the importance of a well-diversified business model to get through a difficult economic period.  The bank with the largest market cap has set a goal of doubling its $444 billion asset management unit by 2018. And it will look to get there by expanding internationally besides being on the lookout for suitable acquisition options. Interestingly, Wells Fargo has set this target even as the asset management industry falls out of favor with major competitors. Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) sold parts of their asset management businesses in recent years, while Deutsche Bank (NYSE:DB) is currently in the process of selling off a huge chunk of the same.
We maintain a $35 price estimate for Wells Fargo’s stock, which is about 12% above the current market price.
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A major chunk of Wells Fargo’s asset management business came with the acquisition of Wachovia in 2008. The bank has publicly endorsed a multi-boutique business model for its asset management business, which it believes is the best way to provide its institutional clients with specialized investment offerings. The strategy led to the bank’s addition of Galliard Capital Management (stable value manager), Golden Capital Management (quantitative manager) and more recently EverKey Global Partners (global equity manager) to its asset management business (see Wells Fargo Expands Asset Mgmt Offering, 20% of Stock Value).
While the bank is expected to stick to this strategy, it will also grow the business organically by offering a series of foreign funds – something which gels well its recently announced plan to expand its business overseas (see Wells Fargo Going Global, Finally).
So how does Wells Fargo’s plan to double its asset management business help its overall valuation?
We currently forecast the bank’s revenue in the form of commissions from its asset management business to grow at roughly 7% annually for the next 7 years, that is through 2018. But if the bank manages to double its assets base over this period, the commissions would also more-or-less double, representing a 5% upside to our $35 price estimate for its stock.Notes: