Lender was forced to act as customers borrowed on credit lines amid pandemic

By Julie Steinberg and Ben Eisen 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 1, 2020).

Wells Fargo & Co. unloaded hundreds of millions of dollars of assets during this spring's market collapse to stay out of trouble with the Federal Reserve.

The Fed put limits on Wells Fargo's size as punishment for its 2016 fake-account scandal. Loans the bank made to customers drawing on credit lines in the pandemic's early days increased its size, and the bank scrambled to sell assets to get back in line, according to people familiar with the matter.

One example: The lender sold assets tied to financing that helps blue-chip companies, including Walmart Inc., manage their cash flow and pay their suppliers, the people said. Wells Fargo ramped up its sales of these assets more than usual in the second half of March and early April during the financial markets' wildest days this year, amid the coronavirus pandemic, some of the people said.

It is a reminder that Wells Fargo, the fourth-largest U.S. lender, is navigating the worst economic crisis since the Great Depression with a major obstacle in its path. The growth restrictions have rippled across the bank, playing into its recent decisions to pare back in consumer and commercial lending, The Wall Street Journal has reported.

When coronavirus was roiling the markets, companies collectively drew down hundreds of billions of dollars on their credit lines, driving up the loans on banks' books. This massive drawdown caused most banks' balance sheets to swell, but it put Wells Fargo in a particularly tough spot. The bank had to quickly unload assets to stay beneath the $1.95 trillion asset cap, the people said.

Wells Fargo has narrowly stayed under the asset cap over the last two quarters, according to regulatory filings. It got a small reprieve in April, when the Fed lifted the restrictions so the bank could make loans through two federal small-business lending programs during the coronavirus crisis.

"We must prioritize balance sheet capacity, both assets and deposits, and there's certainly an opportunity cost for us in an environment like this," Chief Executive Charles Scharf said on July 14.

Wells Fargo opted to sell assets tied to financing arrangements that companies use to pay their suppliers. In such deals, banks directly pay a company's suppliers, sometimes earlier than usual and at a discount to the invoiced amount. The bank makes money on the spread between what it paid the suppliers and what the companies later repay the bank.

Banks like supply-chain financing because it can provide steady revenue from customers they already know and work with in other capacities. Banks often sell assets tied to these deals to other banks and investors, much like a syndicated loan.

Wells Fargo still holds a large portion of these multibillion-dollar supply-chain financing facilities, including with Walmart, according to some of the people. A spokesperson for Walmart said it understands that "syndication and inviting other banks to participate in these programs is common."

During the spring market mayhem, Wells Fargo sold roughly 10% more receivables than it does on average, one of the people said. The bank didn't sell the assets at a loss, another person said.

The supply-chain finance assets were good candidates to sell because they are relatively liquid, with a turnover of about 30 to 90 days, said some of the people. Freeing them up also doesn't much impact relationships with corporate customers, which are used to having a number of financial institutions hold some of their obligations.

Write to Julie Steinberg at julie.steinberg@wsj.com and Ben Eisen at ben.eisen@wsj.com

 

(END) Dow Jones Newswires

August 01, 2020 02:47 ET (06:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
Walmart (NYSE:WMT)
Historical Stock Chart
From Jul 2020 to Aug 2020 Click Here for more Walmart Charts.
Walmart (NYSE:WMT)
Historical Stock Chart
From Aug 2019 to Aug 2020 Click Here for more Walmart Charts.