Analysts at Keefe, Bruyette & Woods said on Thursday that in order for Wells Fargo (NYSE:WFC) to maintain capital ratios of 8.5 percent as Bank of America (NYSE:BAC) will, they would have to raise up to $34 billion to do it in order to pay back their TARP payment.
Even so, the firm said Wells is in a stronger position than BofA, and probably wouldn’t be required to raise near that much.
“In our opinion, we believe that Wells would not need to raise the full $34 billion to repay TARP due to its strong pre-provision, pre-tax earnings. However, we would expect that a common equity raise of $10 to $15 billion at Wells Fargo would be necessary to achieve at least a 6.5% to 7.0% level,” the analysts stated.
The bank has continued to stress their commitment to paying back the tarp money in a shareholder friendly way, which means they don’t want to issue more common stock, which would dilute its value. Wells Fargo already had to sell $8 billion in common stock earlier in the year to meet its stress test capital gap, so is strongly resistant to using common stock as a tool to raise capital.
While front-man for the company, billionaire investor Warren Buffett has been trying to minimize the pressure, attempting to sell the idea of focusing on the flow of earnings at the company rather than capital levels. Buffett’s Berkshire Hathaway (NYSE:BRK-A) has about a seven percent stake in Wells.
The longer it takes the banks to repay their TARP payments, the moodier the public will get, and pressure will mount as other banks like Bank of America pay back their loans.
Still, the government know there we aren’t really in a recovery, and they don’t want to force or pressure banks to pay back the loans and then have a problem of lack of capital again, which they would probably be forced to deal with again, which would be a disaster all around.
To add more complications to the situation, soon companies will have to start adding more capital in response to having to move their off-balance sheet vehicles onto their books. That means the real assets and liabilities held by the companies will be able to be seen by everyone, and not longer hidden from the eyes of investors and shareholders.
Banks are pushing for the payments to under-gird these new assets and liabilities will be phased in over a three-year period, rather than be forced to raise the capital immediately.
There isn’t a consensus on this within the FDIC, and Chairman Sheila Bair is pushing for a vote on in at a board meeting on December 15. Bair has said she’s open to some type of phasing in of the required capital.
Even with Wells Fargo strong reputation for being a well-managed company, and is generating solid profits, it’s still not sure what’s going to be foisted upon them in regard to paying back TARP, as the defaults on Alt-A loans are surging, and expected to continue to surge through the first half of 2010, and defaults on commercial loans will explode in the second half of 2010, causing even more uncertainty. Add to that the exposure Wells Fargo has in California, and no matter what their reputation, they face significant roadblocks going forward.
Eventually that could mean higher capital requirements and the need to raise far more capital than they want to, which would probably lead to another round of selling common stock, which would significantly harm the value of the stock over the long haul.
