Wells Fargo stock rises on report of reserves.

Wells Fargo & Co. stock surged in price Wednesday on a report that the San Francisco bank is heavily over-reserved, which Could be bullish for earnings next year.

Wells Fargo shares, which have been notably volatile over the past six weeks, were up $4.125, or 3.6%, to $116.75 in afternoon trading.

The latest movement came after The Wall Street Journal said some banking analysts feel wells Fargo has excess loan loss reserves of as much as $1 billion. Assuming problem loans fall, the unneeded reserves could be converted into extra profits.

Analysts Cautious

But some bank analysts are wary of recommending Wells Fargo on this basis alone.

"You could apply the same rationale to almost any bank stock in terms of reserves," said Brent B. Erensel of UBS Securities.

"But few bank stocks have a billionaires' premium like Wells Fargo does," he said, "and few are as illiquid because of the concentrated holdings of its staunch fans."

"Billionaires' premium" refers to some of Wells Fargo's prominent investors, who attract act the attention of other buyers.

The largest and best-known investor is legendary stock picker Warren Buffett, who recently raised his ownership stake to 12.2%. Another big holder is media magnate Walter Annenberg.

Mr. Buffett has permission from the Federal Reserve Board to acquire an additional three million shares.

Institutional Investors

The bank also remains a favorite of institutional investors. Indeed, on June 30, an impressive roster 235 money managers held 64% of Wells Fargo's shares outstanding. Among banks, that's one of the highest percentages of institutional ownership.

What worries Mr. Erensel and some others is the prospect that California's weak economy may hurt Wells Fargo's revenue prospects.

"They deserve credit," said the analyst. "They have a great California franchise, they've handled a tough real estate cycle and the stock has been a great performer this year."

But Mr. Erensel said, "at this point, it may be better to pay for long-term revenue growth rather than just recovery from the credit cycle and there are some great bargains out there right now."

Mr. Erensel currently has a "hold" on Wells Fargo stock. He recommends that clients consider investing instead in the shares of Chemical Banking Corp. and First Interstate Bancorp.

Both have good revenue prospects from diversified franchises that include large stakes in Texas, the state likely to benefit the most from enhanced trade from Mexico.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER