Washington has finally taken the TARP off all of the big banks. Late yesterday, Wells Fargo announced that it will repay the $25 billion it owes the government as a result of the bank bailout. Since it was the last of the big banks left owing the Treasury bailout dollars, it's not too surprising that Wells rushed to get out from under the government's thumb. But the move is notable for a few reasons.
This announcement is good news for shareholders on a few levels. Most importantly, Wells will no longer have to pay the government interest payments on the bailout money. That amounted to around $1.25 billion per year. Instead of Uncle Sam getting that cash, it can go towards shareholder dividends or future growth.
But the bad news is these savings will be dispersed over more shares of equity: by selling $10.4 billion in new common stock, current shareholders' stock will be diluted. Just a month ago I noted the dilemma that Wells had -- it didn't want to remain a ward of the state, but it also didn't want to dilute its stock in order to repay the bailout. As a result, it was leaning towards paying back the TARP more slowly through earnings. So what changed? The fact that all other big banks have announced repayment. Clearly, Wells didn't wanna be the only behemoth left to owe the government.
Other good news is that the bank's capital cushion will actually increase due to the stock sale. According to the press release, its Tier 1 common equity ratio will rise from 5.2% to 6.2%. That's still lower than some of its peers. For example, after repayment, Bank of America's ratio stood at 8.5%. So Well's capital cushion being a little higher should also help its image in terms of stability.
It's interesting how strongly Wells responded to the peer pressure of the other large banks having repaid the bailout. As I mentioned, back in November it seemed the bank wouldn't pay back the TARP immediately, but appeared to prefer to do so gradually so not to dilute its equity. Other than the annoying interest payments, Wells didn't feel as much pressure to rush. Unlike the other big banks, it doesn't have much of a Wall Street presence. That means the compensation restraints didn't bother Wells nearly as much as it did its competitors who had to deal with scores of angry investment bankers.
But that must just be the power of peer pressure in the market. It clearly didn't want to be seen as the only major bank to still owe the government. While understandable, what really matters is how shareholders respond. In early trading, its stock was up 1% to 2%, so it seems like the market is pleased with the news.