Analysts Question Wells' Loan-Loss Provision

Wells Fargo's decision to set aside $1.4 billion for its most troubling loans may not be enough, analysts say.

The San Francisco bank said late Tuesday that it plans to record the pretax provision in the fourth quarter and create a special fund to cover losses expected in about $12 billion worth of home-equity loans either purchased or originated through indirect channels, such as wholesale mortgage lending platforms and the correspondent channel.

Analysts wonder about the loss rates on the remaining $71.5 billion of home-equity loans that haven't been designated to the portfolio and why Wells Fargo only added a provision for their worst-performing loans.

"I'm just skeptical that the $1.4 billion is going to be enough over the next several quarters," says Christopher Mutascio, an analyst at Stifel Nicolaus, who has a hold rating on the company and cut his earning estimates for 2008 on Wells Fargo by 25 cents to $2.65 a share. "I'm not so sure that it's behind them. The loss rates in that non-liquidating portfolio are going to continue to rise," requiring Wells Fargo to continue to build its reserves.

Shares of the San Francisco bank surged 3% along with most of the financial sector Wednesday, in large part because of Federal Reserve Vice Chairman Donald Kohn's dovish comments that boosted hopes for additional rate cuts.