Zacks_Analysts' Blog : WFC to Redeem $5.78B TRUPs - Analyst Blog

Last week, Wells Fargo & Co. (WFC) announced that it would fully redeem about $5.78 billion worth trust preferred securities (TRUPs). These include $837.50 million of 7.85% TRUPs and $690.00 million at 8.625%. WFC will also redeem $2.50 billion of 7.7% instruments and $1.75 billion of 9.75% hybrid securities.

The redemption is taking place as a result of a Capital Treatment Event under the securities’ governing instruments. WFC has resolute that a Capital Treatment Event took place with the course of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the first half of 2011, WFC announced that $3.4 billion of trust preferred securities will no longer count as Tier 1 capital under the Dodd-Frank Act and the Basel Committee recommendations known as the Basel III standards.

By repaying TRUPs, banks will be able to reduce interest costs, as these securities pay higher rates than other securities. According to Dodd-Frank Act, banks will be prevented from including these securities as regulatory capital from 2013.

Similarly, in August, KeyCorp (KEY) announced that it would fully redeem about $361 million of Trust Preferred Securities (TRUPs) issued by KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII and Union State Capital Trust I. These include 5.875% TRUPs, 6.125% TRUPs, 7% Enhanced TRUPs and 9.580% Capital Securities.

Also, in May, Fifth Third Bancorp (FITB) also issued a notice to the trustee of Fifth Third Capital Trust VII to redeem 8.875% TRUPs. The company stated that each Trust Preferred Security would be redeemed at a cash redemption price of $25.18.

Though WFC’s results are likely to be affected by the volatile operating environment along with costs of maintaining Basel III norms, we expect the company’s business operations to continue to fuel its credit quality, capital position and liquidity.

WFC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the stock.