Why commercial lending is important to Wells Fargo strategy

Saul Perez - Author

Oct. 7 2014, Updated 5:00 p.m. ET

Helping business grow to grow itself

Despite a strategy that focuses more on the retail segment of loans, Wells Fargo & Co (or Wells Fargo) (WFC) remains competitive in commercial, or industrial lending, too. There is, however, a distinct strategy at play here. Most large banks have a higher percentage of commercial lending. But Wells Fargo has a high percentage of both retail and commercial lending.

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In the year ended 2013, close to 46% of Well Fargo’s lending was in the commercial segment while the retail segment accounted for the majority of lending, or 54%. In its commercial lending portfolio, industrial loans accounted for nearly 25%. Meanwhile, commercial real estate accounted for 15%. Miscellaneous loans accounted for the remaining 6% of commercial loans.

Diversified lending to all sectors

The bank’s strategy is to not focus on any particular segment of industry. This helps it mitigate risk because the bank’s earnings and delinquencies are not dependent on any particular sector. Wells Fargo’s highest contributing industrial sectors are investors, cyclical retailers, oil & gas, and food & beverages, each accounting for nearly 2% of the bank’s overall loan portfolio.

Commercial real estate is strong like mortgages

Just as in consumer real estate, Wells Fargo maintains a strong position in commercial real estate. The bank performs particularly well in the Californian commercial real estate loan market. This market accounts for nearly 4% of overall loans provided by Wells Fargo. Florida and Texas are other markets where the bank has a large commercial real estate portfolio.

Wells Fargo’s position in commercial real estate lending is quite similar to its peers, including Bank of America Corporation (BAC), JP Morgan Chase & Co (JPM), and Citibank, of Citigroup Inc (C). It is a much larger player, however, than the smaller banks included in the exchange-traded fund (or ETF), the Financial Select Sector SPDR (XLF).

In the next article, we’ll move on to look at other major non-interest revenue sources for Wells Fargo.


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