For Wells Fargo, the capital question still looms

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Wall Street’s debate over Wells Fargo & Co. is whether the bank’s capital situation is half full or half empty.

Fittingly, the San Francisco financial giant’s shares on Thursday gave back almost exactly half of their huge gain on Wednesday, which followed the company’s report of a large fourth-quarter loss.

The stock slumped $2.41, or 11.4%, to $18.78, after surging $5 on Wednesday. The financial sector in general also pulled back Thursday after rallying a day earlier.

Despite Wells’ report that it lost $2.6 billion in the fourth quarter -- and that Wachovia Corp., which Wells bought Dec. 31, separately reported a whopping $11.2-billion loss -- Wells’ fans were cheered by the company’s decision to maintain its dividend payout, and by its insistence that it wouldn’t seek more government capital.

In a note titled ‘The Stagecoach Comes Through,’ analyst Joe Morford at RBC Capital Markets wrote that despite the bank’s huge boost in loan-loss reserves in the fourth quarter, Wells wound up with about the level of capital, or net worth, that Morford had expected.

That was about 2.8% for the so-called tangible common equity ratio, a strength indicator that bank investors are watching closely. It measures capital relative to total assets.

Tangible common equity excludes capital from the government’s purchase of preferred shares, also known as the TARP bailout. It also disregards other preferred stock, as well as intangible assets such as goodwill. Because tangible common equity is a bank’s first defense against losses, weakness there could cost common shareholders their cash dividends.

Now, tangible common equity of 2.8% is not great by any definition, but under the circumstances, Morford wrote, Wells’ ability to preserve the ratio at that level was a good thing. He slightly reduced his earnings estimates for 2009 but left intact his ‘outperform’ (buy) rating, on the stock.

Of 23 analysts who cover Wells, 10 now rate the stock a buy, nine rate it hold and just four advise selling the shares, according to Bloomberg News data.

One of the bears is Paul Miller of Friedman, Billings, Ramsey & Co. Miller last week told clients that he believed Wells would be forced to cut its dividend, now 34 cents a share per quarter. He reiterated that view Thursday in a report titled ‘Losses Pressure Capital; Dividend Cut Is Still Looming.’

Miller cut his earnings estimates for Wells more sharply than Morford and kept his ‘underperform’ (sell) rating on the stock, saying that greater-than-expected losses at Wells and Wachoviaare ‘pushing capital levels dangerously lower.’

Without the $25 billion in TARP funds Wells got last fall, it wouldn’t be considered ‘well capitalized’ by regulators, Miller said. And he expects the bank to face bigger loan problems in the sinking economy than some other Wall Street analysts are assuming:

-- E. Scott Reckard