WSJ Questions Wells Fargo's (WFC) Balance Sheet Stability

A Wall Street Journal article published this morning considers the possibility that Wells Fargo (NYSE: WFC) could see problems, specifically, with its balance sheet, than the market is pricing in. The article points out that Wells Fargo is currently trading at the largest premium on a price-to-book basis compared to other top banks such as JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C). At over 2x book value, the WSJ article questions whether this premium is really deserved. Notably, this valuation compares to 1.05x book value at JPMorgan, 0.97x for Bank of America and 0.96 for Citigroup.

Following the company's 10Q, which was filed on Friday of last week, the WSJ cites several potential problems which have become apparent recently and could damage Wells Fargo's so-far unscathed armor:

• illiquid, or Level Three assets, increased in its Q2, however, WFC only wrote-down about $43 million for these assets. Specifically, in Q2, Wells Fargo disclosed its level three mortgages rose from $3.3 billion to $5.28 billion.
  
• included in these level three assets were CDO's, which have been one of the largest problem areas for banks so far this year. AT the end of 2007, Wells Fargo reported $860 million of CDO's, yet the company has yet to post losses from these assets.
  
• Wells Fargo's short-term debt rose drastically during the quarter, up about 60% to $86.1 billion. WSJ believes this sharp increase helped the bank raise cheap money during the quarter, but is concerned that this could create problems as that funding source becomes less available.

Wells Fargo & Company, through its subsidiaries, operates as a financial services company in the United States.

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