Fitch Ratings does not view any rating implications stemming from Wells Fargo & Company's (WFC) plan to repay its $25 billion of Troubled Asset Relief Program (TARP) preferred stock. Fitch does view the additional common stock issuance positively, which reinforces the company's current ratings ('AA-/F1+') and Stable Outlook. Late yesterday, WFC announced it will repay the TARP preferred stock following a $10.4 billion common stock issuance. The company has also committed to raising an additional $1.35 billion of common stock to be issued through benefit plans and $1.5 billion of equity to be generated from asset sales. The company announced today that it has priced a $10.65 billion offering at $25.00 per share. While Tier 1 capital will decline with the repayment, WFC will add approximately 100 basis points (bps) to its Sept. 30, 2009 Tier 1 common ratio which will increase to approximately 6.20% on a pro forma basis. WFC's capital ratios have improved materially since the year-end 2008 Wachovia Corporation acquisition.
WFC's announcement follows agreements that the other large banking companies have reached with regulators and U.S. Treasury to facilitate TARP repayment. Unlike a few of these large U.S. banks, WFC long-term Issuer Default Rating (IDR) had remained comfortably above the support rating floor. The ratings reflected Fitch's view that while WFC was not immune to the asset quality issues impacting the industry, the company's strong earnings capacity, would allow WFC to simultaneously provide for elevated loan losses and build reserve levels, leaving it relatively well positioned. Fitch's ratings also recognize WFC's robust revenue stream, derived primarily from its diverse community and mortgage banking activities, solid core deposit funding and proactive liquidity management. For the third quarter of 2009 (3Q'09), WFC reported another quarter of record operating earnings as it continues to build momentum over a number of business lines. Earnings are driven by a 'Best in Class' net interest margin (NIM) which was 4.36% in the quarter, remaining at the top of the large bank universe. The resilience of WFC's earnings demonstrated in the past two quarters (approximately $3.2 billion per quarter) and expectations for a continuation of solid earnings offset the reduced TARP equity cushion.
WFC's integration of Wachovia appears to be progressing better than originally projected with estimated cumulative merger expenses reduced to $5.5 billion from $7.9 billion and the company on track to achieve the $5 billion annual run-rate of cost savings by 2011. Merger of the bank charters began this quarter and will continue into 2010, with systems conversions ongoing since fall 2009. WFC has converted a significant portion of Wachovia's maturing, higher-cost certificates of deposit into other WFC accounts which has had a favorable effect on WFC's combined deposit growth, cost of funds and NIM. Wachovia's exposures across all risk categories were evaluated and marked to fair value by WFC through purchase accounting as of Dec. 31, 2008. To date, WFC's valuations appear to be holding up well.
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