Wells Fargo (WFC) Arm To Sell Retirement Business For $1.2B

Wall Street biggie Wells Fargo & Company (NYSE:WFC) recently announced that its subsidiary, Wells Fargo Bank, has agreed to divest the Institutional Retirement & Trust (IRT) business to Principal Financial Group (NASDAQ:PFG) based in Des Moines, IA, for $1.2 billion. The transaction, subject to regulatory approval, is expected to close early in third-quarter 2019.

Principal Financial will fund nearly $400-$500 million of the aggregate purchase price through new debt, while the remaining amount will be paid in cash. Also, out of the total price of $1.2 billion, $150 million will be paid in 2021 on strong business performance and exceeding expectations.

Jon Weiss, head of Wells Fargo Wealth & Investment Management, noted, “The scale derived from a combination of IRT and the Principal Financial Group will benefit clients, plan participants, and team members. At the same time this sale reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management.”

Notably, Principal Financial provides a wide range of retirement savings, investment, and insurance products and services to nearly 24 million customers through various subsidiaries.

Wells Fargo’s retirement plan services unit, which includes its 401(k) savings accounts business, if merged with Principal Financial, would aid in expanding similar business of the latter. As of Dec 31, 2018, Wells Fargo’s retirement plan services unit had $827 billion in assets under administration.

Wells Fargo has made such divestments earlier as well. With a view to cut costs, it inked a deal with Flagstar Bancorp (NYSE:FBC) last year to divest all of its branches in Indiana, Michigan and Ohio. Also, it entered into a deal with the local unit of
Popular, Inc. (NASDAQ:BPOP) to offload its Puerto Rico auto finance business.

Our Viewpoint

Wells Fargo started facing troubles in its retail banking segment in September 2016, when its employees opened unauthorized accounts on behalf of the bank’s clients to fulfill sales targets. Following this, scandals in different areas of business came to light, which put Wells Fargo under the strict supervision of regulators.

In May 2018, Wells Fargo disclosed an impressive cost-control plan to help it deal with persistent legal expenses. Also, the bank’s efforts to revamp its financial position supported by lower tax rates and rising rate environment might help it overcome negatives.

Shares of Wells Fargo have lost 7.3% over the past year compared with 6.9% decline recorded by the industry.

Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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