Is It Safe? Wells Fargo Is Unjustly Punished

Wells Fargo has been lumped in with other financial-services companies whose shares have tumbled, but it's much healthier than many of its rivals.
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Investors dumped financial institutions such as

Bank of America

(BAC) - Get Report



(C) - Get Report

during the credit crunch for a simple reason: They're not safe places to invest.

That sentiment tainted the entire financial-services industry even though it may not be justified.

Wells Fargo

(WFC) - Get Report

, for one, is a far steadier company that could weather this storm better than most.

Wells Fargo's shares have fallen 49% in the past year, more than the S&P 500's 39% decline. Still, Bank of America and Citigroup dropped much more, with Citigroup selling for less than $1 a share at one point. Stock markets can amplify uncertainty and create a spiral that unjustly punishes companies. Credit markets, on the other hand, take a more rational approach to a company and the underlying factors that drive its success.

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To measure credit-market sentiment, look at credit default swap (CDS) spreads, which show how much it costs to insure a company's debt. The higher the spread, the more likely a company is to default. Wells Fargo has a CDS spread that's less than half that of Citigroup and about 100 basis points below that of Bank of America. The chart, below, depicts the movement in these spreads and shows that Wells Fargo has continually been far below some of its biggest competitors.

Standard & Poor's gives Wells Fargo a credit rating of AA, the second-highest. Bank of America and Citigroup have ratings of A, one spot above BBB, the lowest rating that's still considered investment grade.

Wells Fargo's relative strength is also depicted in the fact that it has a "hold" rating from Ratings versus a "sell" for Bank of America and Citigroup. The model takes price volatility into account.

Lastly, Wells Fargo has $23.8 billion in cash and relatively low debt compared with its competitors.

Make no mistake -- this is not an investment in a Treasury bill. However, equity investors in Wells Fargo can rest easy knowing their investment is far safer than it would be in most other financial institutions.

Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.