Is Wells Fargo going to be dealing with bad-loan problems after its rivals are in the clear? Fourth-quarter results, reported Wednesday, point to such a scenario.
Wells's nonperforming assets—past-due loans and repossessed collateral—rose 18% from the third quarter. Meanwhile, J.P. Morgan Chase's fell 3.1%, Citigroup's were more or less flat, and Bank of America's rose 5.7%.
Investors watch this credit metric closely. As nonperformers start to fall, banks can slash bad-loan expenses, causing earnings to soar. Nearly all bank stocks have rallied as investors factor in such an earnings boost. But, after the rally, there could be upsets if credit metrics fail to improve in line with expectations. And that is why Wells is interesting. It trades at 1.4 times its book value, compared with J.P. Morgan's 1.08 times. If credit disappoints, the stock could fall to close that gap.
Wells's defenders might say the bank has adequate reserves for its loans. But Wells's nonperforming loans are now 3.12% of outstanding loans, compared with 2.77% at J.P. Morgan. Yet J.P. Morgan's reserve is 74% larger than its past-due loan total, whereas Wells's reserve is the same size.
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