Wells Fargo-Goldman merger rumors underscore how bad things have gone for banks


But don’t hold your breath for merger between Goldman Sachs and Wells Fargo, two lightning rods in the industry.

Such an agreement would create an outcry in Washington, especially among critics of big banks such as Senator Elizabeth Warren. Regulators are unlikely to even bless a merger given Wells Fargo’s troubled past and sanctions against the bank for its fake account scandal.

” I can not see [Rep.] Maxine Waters or Elizabeth Warren support it, “said Kyle Sanders, analyst at Edwards Jones. They plead for the demolition of the banks, without letting the banks get bigger and more powerful. “

However, shares of Wells fargo ((WFC)FOX Business announced a 7% increase on Thursday after banking giant San Francisco could be a target for Goldman Sachs’ merger. The other Goldman Sachs partners would be PNC ((PNC) and US Bancorp ((USB). CNN Business has not verified this report.

Wells Fargo is still in trouble

It is not even clear that the joining of forces would make sense at this time, for one or the other enterprise.

Teaming up with Wells Fargo would only increase Goldman’s exposure to the risk of negative interest rates, which have condemned banks in Europe. And because these two companies have so little overlap on the retail banking front, there may be little room for the type of savings that often drive these transactions.

“Why would you want to double in this space? Asked Nicholas Colas, co-founder of DataTrek Research. “It’s not like you can close a bunch of Goldman branches and save money. There are not any. “

The regulatory hurdles are clearly very high for a Wells Fargo-Goldman Sachs agreement.

First, Wells Fargo already owns more than 10% of all bank deposits in the United States. This legally prevents the bank from acquiring another depository institution, unless the rules have been changed or the banks have sold enough deposits to satisfy regulatory authorities.

Second, Wells Fargo is still stuck in the penalty area with regulators.

In 2018, the Fed imposed an asset cap on Wells Fargo that prevents the bank from exceeding $ 2 trillion in assets. Last month, the Fed relaxed these growth restrictions, but only to allow Wells Fargo to lend aggressively to small businesses. The acquisition of Goldman Sachs would add another $ 1.1 trillion to Wells Fargo’s balance sheet.

Bank stocks are crushed as economic reservoirs

However, the fact that we even talk about it underlines how bad the feeling is towards the big banks right now, and these lenders in particular.

Wells Fargo’s stock has fallen 56% this year, including a loss of 19% this month alone. Wells Fargo closed at $ 22.53 on Tuesday, its lowest result since June 2009, well before the false accounts scandal of 2016.

Goldman sachs ((GS) has lost a quarter of its value so far this year and is trading at just 80% of its book value. The once-touted financial market activity of Wall Street Bank has struggled for years and its retail division Marcus is suffering from low interest rates.

Banks & # 39; big dividends are on fire as profits plummet

the KBW Bank Index ((BKX), which includes Wells Fargo and other major banks such as Citigroup ((VS) and Bank of America ((BAC), has lost more than 40% of its value this year as the economic situation continues to deteriorate considerably.

More than 36 million Americans filed for unemployment on Friday and retail sales plummeted. Small businesses find it difficult to stay alive. And bankruptcies are on the increase.

Big banks are building huge loan loss reserves designed to absorb their near-term losses, which analysts say may be just the tip of the iceberg. The creation of additional reserves should wipe out the banks’ profitability during the second quarter.

“Extremely damaging”

The mood in the banking sector is further clouded by speculation that the Federal Reserve could follow in the footsteps of Europe and Japan by lowering interest rates below zero. President Donald Trump is rooted for this – even if critics say that negative rates have done more harm than good.

Although Fed chief Jerome Powell and other Fed officials have insisted that they do not plan to turn negative, investors are concerned that this will not always happen.

“If you asked me six months ago if we would ever have negative rates in the United States, I would say, ‘No, you’re crazy,'” said Sanders, Edward Jones analyst. “But now I think it is possible, although it is a low probability event. “

Negative rates are the last thing banks need given the difficult environment and the problems they have posed for European lenders. Consider that European bank stocks have recently fallen to levels not seen since 1988.

“Everyone is watching this experience and saying that if you replicate it here, you just can’t have banks. It would be extremely damaging to the banks, ”said Colas of DataTrek.

Dividend pressures increase

Even without negative rates, the dividends of the big banks are subject to financial and political pressures.

Former bank regulators Janet Yellen and Sheila Bair urged the Fed to force banks to suspend their dividends in order to have enough firepower to help consumers and businesses weather the economic storm.

The major banks have already suspended their share buybacks, but have so far resisted touching their coveted dividend payments. But analysts warn that this may change in the coming weeks as the Fed subjects banks to their annual stress tests.

Wells Fargo did not make enough money to cover its dividend payments in the first quarter. KBW estimates that the bank’s dividend will represent 221% of its revenues in 2020, compared to only 59% for the large median bank.

Although KBW maintains that Wells Fargo has the resources to keep its dividend intact, the firm warns that there is a risk that regulators may force a change.

“If they wish, the Fed could reverse engineer specific banks to reduce dividends. These are their stress tests. It’s their black box, “said Brian Kleinhanzl, banking analyst at KBW.


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