—Hugh Leask & Joy Wiltermuth
Wells Fargo is rumoured to be planning an investment arm to buy European asset-backed securities, similar to JPMorgan’s chief investment office, which has emerged as a major anchor of the region’s post-crash new issue market.
Details on Wells’ strategy remain scant, as an official at the firm in London declined comment on the matter. A spokeswoman in Charlotte, N.C., declined comment. But securitization professionals in London told TS the plan has been in the works since last summer.
A London-based ABS syndicate official at a U.S. investment bank said the rumour indicates the proposed desk is close to getting a green-light from Wells’ management to invest in structured finance products on a rolling one-month basis. “They have sent someone over to do the due diligence, though we have not seen anything on this yet,” the syndicate chief said.
The advantage of setting up an investment wing, such as JPM’s CIO, is to lessen the impact of recent U.S. regulatory reforms. “JPMorgan CIO is an asset manager, not a prop desk, it does not fall into the Volcker Rule,” the U.S. bank syndicate head said, referring to a provision in the Dodd-Frank Act that places curbs on investment banks’ proprietary trading activities.
The move is also seen as a way for Wells to re-establish the presence Wachovia Securities held in the region prior to its merger, as well as to shake loose a piece of JPMorgan’s foothold. The latter has taken positions in several European asset- and residential mortgage-backed deals since the financial crisis. JPMorgan most recently bought parcels of senior tranches in Aegon Levensverzekering’s €1.5 billion ($2.1 billion) Dutch prime RMBS, Saecure 10, in which the bank also acted as co-lead manager (TS, 3/28). “When it comes to investors for European ABS investors, JPM CIO is one of the only games in town,” the syndicate head said.
Another senior syndicate head at a U.K. bank confirmed Wells has been considering the launch since last year, though he told TS he has seen little practical movement on the strategy.
An ABS investor in London said a big advantage to Wells setting up a similar investment wing is to diversify its U.S. holdings of fixed-rate securities with European floating-rate assets.
The ability to hedge interest rate trading positions in the U.S. is a looming concern. Fitch Ratings reported Wednesday that U.S. banks—the largest holders of mortgage-backed securities—could face losses on their roughly $1.3 trillion holding due to a rate hike. “In a rising rate scenario, banks’ MBS holdings would face either [mark-to-market] losses or, if held on a long-term basis, lower net interest income,” the report stated. “Prior to the financial crisis, interest rate risk was traditionally perceived as the dominant form of risk facing mortgage market participants,” it added.
Aside from diversification, a London-based investment arm is a way to pick up notes at wider spreads in Europe. “The difference is that JPM’s CIO can buy U.K. or Dutch mortgage deals at 140 bps over, or U.S. credit cards at 30,” the U.S. bank syndicate head remarked.
Still, JPMorgan is in a unique position to play in Europe since it has plenty of excess liquidity, according to the ABS investor. The U.S. bank syndicate chief agreed. “Other banks are also looking at it, but they tend to be more ‘domestic-centric,’’’ he said, adding that some banks are still trying to get comfortable in looking outside of their home turf. “Merrill was looking at building something, and Goldman tried to do something. And Lehman fell over.”
If launched, Wells’ investment arm will be a welcome new addition to the European ABS investor base and a boost to the market’s nascent recovery. Last month, Norway-based DnB Nor, reckoned to be one of the top five European structured finance investors, signalled a shift away from securitization toward covered bonds because of tougher capital treatment for investors under the Basel III and Solvency II reforms (TS, 3/17).
A JPMorgan spokesman in London did not return calls.