Wells Fargo No. 1 in risky Level 3 assets

Wells Fargo & Co., the largest U.S. home lender, ranked first among the six biggest U.S. commercial banks with the highest percentage of hard-to-value assets in its securities portfolio, according to Standard & Poor’s.

So-called Level 3 assets represented 14.5% of holdings that Wells Fargo had tagged for sale as of March 31, S&P said last week in a report. PNC Financial Services Group Inc. ranked second with 13.6%, followed by JPMorgan Chase & Co. with 6.8%, the ratings company said.

“Level 3 asset values use inputs that are unobservable and are often based on internal modeling,” S&P analysts wrote. “Because they are the most subjective, and least liquid, of the three types of assets, we believe they carry the most risk relative to others in the portfolio.”

Securities portfolios of the largest lenders drew scrutiny after JPMorgan reported losses of at least $5.8 billion from trades in credit derivatives at its chief investment office.

The portfolios have helped the biggest U.S. banks reap profits amid weak economic growth and new regulations that encourage the buildup of assets that can be sold easily, S&P said.

“Investment portfolios now ac-count for a larger proportion of large, complex banks’ revenues and earnings relative to pre-crisis levels,” which could lead to increasing revenue and earnings concentration,” the analysts wrote in the report. The portfolios have “grown significantly” since 2007 and may result in ratings downgrades, they wrote.

Wells Fargo spokeswoman Mary Eshet declined to comment.

Chief executive John Stumpf told analysts May 31 that Wells has a “disciplined process” for evaluating potential dangers.

“We tend to run our company with a lot less risk vis-à-vis our large-bank competitors,” he said.

Wells Fargo holds residential and commercial mortgage bonds, collateralized debt obligations, credit default swaps and other derivatives among its Level 3 assets, according to its quarterly filing.

The company held $230.3 billion in debt and equity securities in its available-for-sale book at the end of March, S&P said in the report. PNC held $53.4 billion, and JPMorgan, the biggest U.S. bank by assets, had $378.7 billion, according to S&P.

Bank of America Corp. and Citigroup Inc. held the lowest concentrations of Level 3 assets among the six banks, at 2.1% and 2.8%, respectively, followed by U.S. Bancorp’s 3.4%, according to S&P.

Related Topics: Credit Rating Agencies, Wells Fargo & Co.