Wells Fargo Exits TARP

On Wednesday, Wells Fargo & Co. (WFC - Analyst Report) finally exited the Troubled Asset Relief Program (TARP) by repaying the entire $25 billion that it had taken as aid in October 2008. Accordingly, the company bought back the $25 billion of series D preferred stock issued to the US Treasury under the TARP and also paid accrued dividends of $131.9 million as part of the redemption. Last week, Wells Fargo had sold 489.9 million new shares of its common stock at $25 each, raising $12.25 billion to help repay the TARP money.

Since issuing of the preferred stock in October 2008, Wells Fargo has paid a total of $1.441 billion in dividends to the US Treasury and US taxpayers. However, the timely repayment of TARP funds has helped the company save the annual preferred stock dividend payment of $1.25 billion to the government. This is projected to be slightly accretive to earnings in 2010. The repayment of the entire bailout money to the US Treasury has additionally relieved Wells Fargo from pay restrictions and other government regulations. The company will now be able to focus on its core growth strategies to rebuild its historical position as the global economy goes into a recovery mode.

Wells Fargo has been the third largest bank in the US to repay TARP loans in Dec 2009. Recently, Bank of America Corp. (BAC - Analyst Report) exited TARP by repaying the $45 billion that it had received in two government bailouts. On Wednesday, Citigroup Inc. (C - Analyst Report) also announced its final departure from TARP after buying back $20 billion of trust preferred securities it had sold to the Treasury Department under TARP's Capital Purchase Program. About ten other giant banks such as JPMorgan Chase & Co. (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report), Goldman Sachs Group Inc. (GS - Analyst Report), American Express Co. (AXP - Analyst Report), State Street Corp. (STT - Analyst Report), Capital One Financial Co. (COF - Analyst Report) and BB&T Corp. (BBT - Analyst Report) had already repaid TARP in June 2009.

The cumulative repayments have helped the Treasury Department regain more than $185 billion out of the $245 billion given to various banks under the TARP. This in turn will aid the macro outlook and the banks’ position in the US, which had taken a beating during the peak of financial crisis.

However, the near-term outlook of Wells Fargo remains sluggish as the buyback of preferred stock from the government is expected to shrink income available to common shareholders in the fourth quarter of 2009 by $2 billion. The reduction is expected on the back of the fact that the book value of the preferred stock is less than the amount paid.

Moreover, even after the repayment, the Treasury Department will continue to hold warrants to procure approximately 110 million shares of the Wells Fargo common stock at an exercise price of $34.01 per share. It remains to be seen if the company will buy these shares entirely like Goldman Sachs or auction them like JPMorgan. This uncertainty does not liberate the company entirely from the government stringencies currently, thereby causing some concern over the near term. Hence, for the time being we recommend a Neutral stance on the stock.

Read the full analyst report on WFC

Read the full analyst report on BAC

Read the full analyst report on C

Read the full analyst report on JPM

Read the full analyst report on MS

Read the full analyst report on GS

Read the full analyst report on AXP

Read the full analyst report on STT

Read the full analyst report on COF

Read the full analyst report on BBT