U.S. seen involved with Wells for some time

NEW YORK (Reuters) - Back in March, Wells Fargo & Co (WFC.N) Chairman Dick Kovacevich scoffed at being pressured into taking $25 billion of taxpayer money from the government, saying his bank was healthy and didn't need it.

Now, the fourth-largest U.S. bank may find itself unable to get free of the government's clutches for some time.

The bank said on Thursday it would need $13.7 billion of capital, in light of results from the U.S. government stress test, and on Thursday the bank said it plans to sell $6 billion of common stock.

The stress test findings give more fuel to short sellers who for months have argued that there are dangerous risks lurking on Wells Fargo's balance sheet.

And even though investors like Warren Buffett who have demonstrated great faith in Wells Fargo's earnings power, government entanglement may weigh on the bank's performance in the near term, analysts said.

"Government involvement is a real impediment to doing business," said Anton Schutz, president of Mendon Capital, a fund manager focusing on financial stocks.

"Wells Fargo has tremendous earnings power, but the government's role makes valuing the company very difficult."

To investors shorting Wells Fargo, the extra capital requirements come as no surprise.

Wells Fargo has nearly $130 billion of home equity loans on its books, about a quarter of which are in California, the epicenter of the nation's housing crisis.

That loan book is about three times larger than the bank's tangible common equity, which means heavier-than-expected losses could have a big impact.

In the first quarter, as many banks were adding heavily to their loss reserves, Wells Fargo boosted its reserves by just $1.3 billion, meaning it was writing off bad loans almost as fast as it was setting aside money for them.

And the bank at December 31 had about $270 billion of off-balance sheet entities such as asset-backed commercial conduits and collateralized debt obligations that could move onto its balance sheet.

NO REASON FOR CONCERN?

To Wells Fargo's supporters, such concerns are overblown.

Buffett, whose Berkshire Hathaway Inc (BRKa.N) is the bank's largest shareholder, said on Sunday he would buy shares of the bank at then present prices, and that Wells Fargo did not need more equity capital.

The San Francisco-based bank has long been admired for its ability to sell multiple products, from credit cards to home loans to personal loans, to consumers.

With the December 31 purchase of Wachovia Corp, it has a much bigger branch network for selling products and collecting deposits.

"There's no question, they are gaining market share, and they're a survivor," said Bill Fitzpatrick, a stock research analyst at Optique Capital Management in Milwaukee, Wisconsin. "It's a great stock to be in right now."

But Wells Fargo also has an unusually high valuation: its shares now trade at around 1.5 times book value, or accounting value, based on a closing price of $24.76 on Thursday.

JPMorgan Chase & Co (JPM.N), which does not have to raise capital under the stress test and also has a strong U.S. bank franchise, trades at a little under book value, and many other competitors are well below their book value.

Wells Fargo's premium valuation may not be justified given the governments demands for more capital, analysts said.

U.S. regulators will not likely let the bank pay back money from the Troubled Asset Relief Program in the near term, which means the bank will face more stringent pay restrictions for its employees and more U.S. scrutiny in general.

"Wells Fargo is not an easy company to value now, but we think its valuation now is too high," Schutz said, adding that many bank shares are overvalued.

(Editing by Ted Kerr, Bernard Orr)