Wells Fargo looks pricey given TARP, mortgage losses
NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) shares look expensive by some measures, particularly as losses mount on a large pool of troubled loans it took on as part of its Wachovia Corp takeover.
Shares in the fourth largest U.S. bank by assets trade at a higher valuation than its peers, as measured by premium to their tangible book value.
Right now, the bank's shares trade at about 2.2 times its tangible book value, compared with 1.9 times for JPMorgan Chase & Co (JPM.N), generally considered the best in breed among top banks and about 1.3 times for Bank of America Corp (BAC.N).
Such a valuation may have made sense when Wells Fargo was a major regional bank, but after its acquisition of Wachovia, Wells Fargo is a colossus without a ton of room to grow.
Even worse, Wells Fargo may have some serious balance sheet issues to wrestle with.
The Wachovia acquisition, which for the first time gave Wells a nationwide footprint, also left the bank saddled with billions of dollars of subprime mortgages, commercial real estate loans, and other toxic assets.
Any losses on those loans are likely to add to pressure on the bank to raise more capital.
"The balance sheet is undercapitalized given some of the risky stuff they own," said Keith Davis, analyst at Farr, Miller & Washington. "It's going to be rough sledding for them over the next several quarters."
Wells Fargo does not appear to be better capitalized than its competitors. Its ratio of tangible common equity to tangible assets is below 4 percent. JPMorgan is in the mid-4 percent range, while Bank of America is at 4.8 percent.
Wells Fargo could face more credit losses, analysts said. The company inherited about $38 billion of impaired mortgages from Wachovia that could have another $2.3 billion of losses coming, according to UBS analysts.
Other loan categories could also trigger billions of dollars of losses, the analysts said.
"We did not find any signals in Wells Fargo's credit trends this quarter that allay our concerns for higher-than-expected credit costs over the next 12 to 18 months," UBS analysts led by Heather Wolf wrote in October after the bank posted third-quarter results.
To be sure, Wells Fargo took a capital hit when it bought Wachovia and marked down many of its assets to reflect expected lifetime losses. Its competitors are taking those losses over time, so Wells Fargo's capital levels have a fair reason to look a bit light.
Wells Fargo, whose biggest shareholder is Warren Buffett's Berkshire Hathaway,(BRKa.N) has long been adept at selling multiple products to customers -- from mortgages to credit cards to checking accounts -- to maximize profits.
The bank's plan has been to rebuild capital through earnings, a spokeswoman for the bank wrote in an emailed statement. These earnings have helped lift the bank's Tier 1 common equity ratio to 5.2 percent, from 3.1 percent at the end of December.
TARP
But some analysts argue that even with its banking skills and the Wachovia writedowns, Wells Fargo still faces capital pressure. The recipient of $25 billion of capital from the U.S. government last year under the Troubled Asset Relief Program, the bank's chief executive said in early September it planned to repay the TARP funds shortly.
But the bank has not yet applied to repay the funds. And in mid-September, a source said the government was unlikely to approve exits from the TARP program until the end of the year, signaling to some investors that government officials may be less confident in the bank than Wells Fargo's management.
The bank will work closely with regulators to determine the appropriate time to repay TARP while retaining strong capital levels, the spokeswoman said by email.
"They did a 180 from being very aggressive (on repaying TARP)," said Bill Smith, chief executive of Smith Asset Management in New York, which recently sold its Wells Fargo shares. "That made us a little nervous," Smith said.
(Reporting by Elinor Comlay; additional reporting by Dan Wilchins, editing by Leslie Gevirtz)
