Dubious distinction: Wells Fargo No. 1 in risky assets, says S&P

Bank sitting on more hard-to-value securities than rivals; inputs 'unobservable'

Wells Fargo & Co. (WFC), the largest U.S. home lender, ranked first among the six biggest U.S. commercial banks with the highest percentage of hard-to-value assets in its securities portfolio, Standard & Poor’s said.

So-called Level 3 assets comprised 14.5 percent of holdings the San Francisco-based firm had tagged for sale as of March 31, S&P said yesterday in a report. PNC Financial Services Group Inc. (PNC) ranked second, with 13.6 percent, followed by JPMorgan Chase & Co. (JPM)’s 6.8 percent, the ratings company said.

“Level 3 asset values use inputs that are unobservable and are often based on internal modeling,” S&P analysts including Stuart Plesser wrote. “Because they are the most subjective, and least liquid, of the three types of assets, we believe they carry the most risk relative to others in the portfolio.”

Securities portfolios of the largest lenders drew scrutiny after New York-based JPMorgan reported losses of at least $5.8 billion from trades in credit derivatives at the firm’s chief investment office. The portfolios have helped the biggest U.S. banks reap profits amid weak economic growth and new regulations that encourage the buildup of assets that can be sold easily, the ratings firm said.

“Investment portfolios now account for a larger proportion of large, complex banks’ revenues and earnings relative to pre-crisis levels, which ultimately could lead to increasing revenue and earnings concentration,” the S&P analysts wrote in the report. The portfolios have “grown significantly” since 2007, they said.

The portfolios may result in future ratings downgrades, the analysts wrote. Mary Eshet, a Wells Fargo spokeswoman, declined to comment.

‘Disciplined Process’

Chief Executive Officer John Stumpf told analysts on May 31, three weeks after JPMorgan initially disclosed trading losses, that Wells Fargo has a “disciplined process” for evaluating potential dangers.

“We tend to run our company with a lot less risk vis-a-vis our large bank competitors,” said Stumpf, 58.

Wells Fargo considers certain residential and commercial mortgage bonds, collateralized debt obligations, credit-default swaps and other derivatives among its Level 3 assets, according to its quarterly filing.

The bank held $230.3 billion in debt and equity securities in its available-for-sale book at the end of March, of which 47 percent were Treasury and agency securities, S&P said in the report. PNC, based in Pittsburgh, held $53.4 billion and JPMorgan, the biggest U.S. bank by assets, had $378.7 billion, according to S&P.

Bank of America Corp. (BAC) and Citigroup Inc. (C), the lenders that each took and repaid $45 billion government bailouts, held the lowest concentrations of Level 3 assets among the six banks at 2.1 percent and 2.8 percent, respectively, followed by Minneapolis-based U.S. Bancorp’s 3.4 percent, according to S&P.
–Bloomberg News–

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