Wells Fargo 's business is going gangbusters -- its first-quarter earnings show this: Revenue for Wells Fargo (ex-Wachovia) grew 16% year on year. My problem is that the bank's balance sheet still looks excessively leveraged, and I think the company's sterling reputation (Warren Buffett's Berkshire Hathaway is the largest shareholder) may be causing investors and analysts to gloss over that fact.
Before I get started, I want to try to preempt any e-mails or
comments about being paid by "shorts" to write this article. I already
know some of Wells Fargo's strengths -- they're the reasons I bought
shares -- but I'm more interested in finding out about its weaknesses
or things I may have misunderstood about the company. I want to know
the reasons not to own the stock; thus, it may appear from my
articles that I have a negative bias toward the company. On top of
that, I recently allowed my membership to the Association of
Professional Market Manipulators to lapse.
An inconsistency hiding in plain sight
Here
is a glaring inconsistency: How is it that a reputedly well-run,
conservative lender like Wells Fargo finds itself near the bottom of
the pack with respect to its tangible common equity (TCE) ratio?
| Bank | Tangible Common Equity Ratio (as of March 31, 2009, unless otherwise noted) |
|---|---|
| SunTrust Banks | 5.8% |
| Goldman Sachs (NYSE: GS) | 4.6%* (March 27, 2009) |
| Morgan Stanley | 4.3% |
| JPMorgan Chase (NYSE: JPM) | 4.3% |
| US Bancorp (NYSE: USB) | 3.7% |
| Wells Fargo (NYSE: WFC) | 3.3% |
| PNC | 3.3% |
| Citigroup (NYSE: C) | 3.0%** (Dec. 31, 2008) |
| Bank of America (NYSE: BAC) | 3.1% |
Source: Standard & Poor's Capital IQ.
*Estimated.
**Prior to the common shares/preferred stock exchange.
Could Wells Fargo earn its way to a healthier capital position?
Given enough time, of course it could -- the current environment is highly favorable
for banks. However, the California lender might not have that luxury if
the government's stress tests indicate that its capital levels are
inadequate. Bloomberg reported today that the government could release
its results publicly on May 4 (banks will receive preliminary findings
tomorrow) and could require banks to address how they plan to make up
any capital shortfall at that time.
This window might get crowded
Goldman Sachs timed last week's $5 billion equity raising brilliantly. Wells Fargo's bullish earnings pre-release
on April 9 looked tailor-made to set the stage for an equity offering
of its own, but the bank didn't follow through. If Wells is required to
raise capital in the near future, the market may be less welcoming,
particularly if it is asked to receive several "bad pupils"
simultaneously.
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