Wells Fargo (NYSE: WFC) May Be Overvalued Because of TARP Obligations and Mortgage Losses

Wells Fargo & Co (NYSE: WFC) shares may look expensive by some measures because of mounting losses from a large pool of troubled loans that it has taken on as part of its Wachovia take-over and its obligations to the fedearl government.

Currently Wells Fargo’s shares are trading at about 2.2 times its tangible book value. JP Morgan Chase (NYSE: JPM) is trading at 1.9 times its book value and Bank of America (NYSE: BAC) is trading at 1.3 times its book value. Citigroup (NYSE: C) is actually trading at less than its book value.

Although a valuation of 2.2 times book value may have made sense when Wells Fargo was a major regional bank, after its acquisition of Wachovia, its’ become a behemoth that does not have substantial growth possibilities.

Wells Fargo may also have potentially serious balance sheet issues to wrestle with. Although its takeover of Wachovia Corp gave the bank a nationwide footprint, it also left the firm saddled with billions of dolalrs worth of toxic assets including sub-prime mortgages and commercial real setate loans. The bank inherited about $38 billion of impaired mortgages from Wachovia and may have another $2.3 billion worth of losses coming into according to analysts from UBS.

Additional losses from real estate loans will likely add pressure to the bank to raise additional capital. Many analysts believe that Wells Fargo’s balance sheet is undercapitalized given the amount of risk-laden assets that the bank owns. Currently Wells Fargo’s ratio of tangible common equity to tangible assets is less than 4%. JP Morgan Chase is at about 4.5% and Bank of America is at 4.8%.

UBS analysts also fear that other loan categories could also trigger billions of dollars worth of additional losses. According to Heather Wolf, a UBS analyst, “We did not find any signals in Wells Fargo’s credit trends this quarter that allay our concerns for higher-than-expected credit costs over the next 12 to 18 months.”

Wells Fargo took a capital it when it had taken over Wachovia last year and marked down several of its assets to reflect expected lifetime losses. Wells Farog is hoping to rebuild its capital through earnings, according to a spokeswoman from the bank. The company’s earnings have helped improve the bank’s Tier 1 common equity ratio to 5.2%, up from 3.1% at the end of last December.