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On Tuesday, The Charles Schwab Corporation (
- Analyst Report
became the latest bank to announce the redemption of trust preferred securities (TruPS). Schwab stated that it would redeem all the Fixed to Floating Rate TruPS issued by the Schwab Capital Trust I.
The redemption also involves common stock issued by the Schwab Capital Trust I and held by the company. The overall redemption forms part of the company’s plan to redeem all the junior subordinated debt, which underlies the TruPS as well.
Schwab’s decision to redeem TruPS follows the announcement of new capital rules by the Federal Reserve earlier this year. As per the new proposal, beginning 2013, the TruPS issued prior to May 19, 2010 would not be considered for the calculation of Tier 1 capital ratio.
The redemption price of the securities has been kept at 100% of the liquidation amount of each of the trust preferred security along with all the accumulated and unpaid distributions. The redemption is scheduled for August 31, 2012.
TruPS Redemption by Other Banks
During the first half of 2012, many banks have redeemed TruPS. Notable names include SunTrust Banks Inc. ( STI - Analyst Report ) , which redeemed TruPS worth approximately $1.19 billion. Further, Bank of America Corporation ( BAC - Analyst Report ) and The PNC Financial Services Group Inc. ( PNC - Analyst Report ) redeemed securities worth $3.9 billion and $967.5 million, respectively.
Redemption of TruPS is a strategic fit as a step like this provides banks with the opportunity to bring down their interest expense. Moreover, this will help in satisfying the regulatory norms since according to the Dodd-Frank Act, from 2013, banks will no longer be able to consider these securities as regulatory capital.
Schwab currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
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