Balance-sheet doubts still weighing on Wells Fargo shares

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Questions about the quality of Wells Fargo & Co.’s balance sheet continue to dog the bank’s stock this week. The shares slumped 15% from Monday’s close through Thursday -- three times the decline of the average big bank stock.

At Thursday’s closing price of $16.27, the stock had surrendered nearly all of the 31% gain it scored on Jan. 28, when the bank reported a large fourth-quarter loss but kept its dividend steady and said it had no plans to go to the government for an additional capital infusion.

As my colleague E. Scott Reckard noted in this post after the earnings report, the size of Wells’ capital cushion relative to assets remains a source of concern to some analysts, even though the San Francisco bank insists that its balance sheet is strong.

On Thursday, Bloomberg News’ David Reilly pointed up the issue of Wells’ valuation of its mortgage-servicing rights, which are carried on the balance sheet at $16.1 billion. But that’s a ‘squishy’ asset, Reilly noted. Excluding it from the bank’s listing of ‘tangible’ assets would leave Wells looking much weaker in terms of its capital cushion.

Earlier this week, blogger Mike Shedlock at Global Economic Trend Analysis focused on Wells’ huge exposure to commercial real estate loans ($356 billion as of Dec. 31, including loans of newly acquired Wachovia Corp.) and home equity loans ($110 billion), and questioned the idea that the bank had set aside adequate reserves to cover future loan losses in those increasingly troubled sectors.

Shedlock also has concerns about assets Wells is keeping off-balance-sheet in so-called qualifying special-purpose entities.

It’s nothing new for Wells to face doubters -- or for the bank to blow right past them and rack up record earnings. Wells’ stellar long-term performance is why Warren Buffett is the company’s No. 1 shareholder, with a 6.9% stake.

Still, with the stock down 45% year to date, questions about Wells’ health clearly are resonating with more investors.

-- Tom Petruno