Wells Is Most Overpriced Big Bank, Risk Study Finds

Wells Fargo & Co., the San Francisco superregional banking firm, is the most overpriced big bank when reported book value is adjusted to reflect credit risk.

Recently, Wells stock sold at a dizzying 447% of true book value, according to James M. Rosenberg, an industry analyst at Shearson Lehman Brothers who zeroed in on 15 money-center and large West Coast institutions in a research report called "The Big Bank Barbershop: Credit-Risk Haircuts to Book Value."

The study found that the book and adjusted book are out of synch at numerous big banks. To the extent that stock prices are tied to book value, a popular measure these days, then the stocks are trading at higher levels than investors believe.

Stock prices of Citicorp, Chase Manhattan Corp., and Security Pacific Corp. also turn up as overvalued - but far less so than Wells. By contrast, shares of Manufacturers Hanover Corp., Chemical Banking Corp. and First Chicago Corp. are undervalued.

Factoring in Loan Risks

The study assesses the degree to which credit risk could damage these bank's profitability and financial strength.

"Most money-center banks' reported book values vastly overstate their real net worth," said Mr. Rosenberg. That is because they give no consideration to goodwill and other intangible balance sheet items.

"More importantly, they do not address the issue that some loans are not fully collectible," said Mr. Rosenberg, who asserted that the banks' stated book values "are only starting points in examining the net worth of these organizations."

Among the 15 banks, adjusted tangible book value - or true book value - was nearest to reported book value at four institutions: BankAmerica Corp., Bankers Trust New York Corp., J.P. Morgan & Co., and Republic New York Corp.

Citicorp Also Seen Overpriced

But adjusted book values were less than half of reported figures at both Citicorp and Wells.

The Shearson analyst blamed that on "very weak loss reserves at Citicorp and large volumes of high-risk real estate and highly leveraged transaction loans at Wells."

Wells' March 31 book value was $59.24 per share, but intangibles of $20.70 per share reduce it to $38.54, and a credit risk factor of $17.45 then slices it further to an adjusted tangible book value of $21.09.

Selling at $94.38 on June 3, Wells price per share was 447% of true book value. Meanwhile, Citicorp, at $16.25, sold at 139% of its true book value of $11.67, and the median price to adjusted book value among the 15 banks was 143%.

The adjusted book value for Wells' shares puts the holding of its largest single shareholder in perspective. Warren Buffett, the legendary investor, owns 5 million shares of Wells and disclosed in the annual report of his company, Berkshire HathawayInc., that his average cost per share was $57.88.

An Inexact Science

Mr. Rosenberg acknowledged that "there is no perfect way to measure the credit risk on, or even more so, off, a bank's balance sheet." [Graph Omitted]

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