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Book Value Analysis Is Completely Irrelevant To Wells Fargo

|Includes:USB, Wells Fargo & Co. (WFC)

Once again a noted bank analyst this morning on CNBC, on a bullish note, stated that major bank stocks have room to move up. The only problem is that he hopes they can move all the way up to 1.3 times book value.....wow!

This gets a little problematic for investors in Wells Fargo, WFC that currently trades at 1.37 times book value and US Bancorp USB that trades at 1.93 times book.

I find it to be totally incredulous that anyone would consider book value for these two banks. The inclusion of these banks in book value analysis has obviously been rejected by the market for good reason and these lazy analysts need to distinguish Wells in particular from this broad brush approach.

Wells Fargo is the nation's most valuable bank by market cap. Isn't it time you spent a couple of minutes to learn and articulate why it is different than Citi, BAC and even JPM? (In fact it would be nice if CNBC started to put Wells on top of the bank quote chart, instead of ignoring it)

Listen analysts: Book value of a bank and in particular, tangible book value, is only relevant if a bank's earning power is so low that it has no business value...ie. it is only worth as much as its parts on a fire sale. (Even then, book is a pretty dubious indicator of value)

Ponder the book value of the following assets:

  • Deposits: What is the book value of $920,000,000,000 of virtually no interest rate deposits? $0 (actually I think they have a $12 bill asset for acquired deposits that is amortizing at $2 bil./year and wrongfully hurting earnings)
  • Wachovia Bank: It has a book value as an asset on Wells Fargo books of around $12 billion, the amount paid for it. It was worth around $100 billion a year before Wells acquired it in an extreme fire sale.
  • Wells has spent $6 billion over the last 3 years integrating Wachovia into Wells. What's the book value of these costs? $0
  • What's the book value of the Coke formula that generates $ billions of annual profits? $1
  • What's the book value of any asset that earns returns that are vastly greater than the book value indicator of "value?"...Yup...it's still BOOK VALUE
OK, what would the market pay for $920 billion of interest free deposits that can be invested @ 5%? More than $0?

How about these other assets? More than book?

In all fairness, the analysts keep limiting the projected value of the banks because they believe their earnings prospects are limited by Dodd Frank (but what the hell does this have to do with book value?)

Dodd Frank, in particular, the Prop trading and Volcker rule will hurt bank earnings of those banks that relied on these sources for core income...NOT WELLS FARGO

As long as analysts take such a lazy, one size fits all analysis of big banks they are themselves "irrelevant" and people that will actually look under the hood will profit.

BTW in 2003 both Wells and USB traded at 3 times book and I believe, if earnings so justify, they'll return there within a couple of years.

Disclosure: I am long WFC.

Stocks: WFC, USB