On Tuesday, Wells Fargo & Company (WFC) announced its plans to repay government bailout money in the near future without raising fresh capital, in order to protect shareholders’ interest.

Wells Fargo remains confident that it will be able to generate the capital internally through better earnings performance in the upcoming quarters. Hence, it does not intend to raise new equity capital and dilute the current shareholders’ interest to exit the Troubled Asset Relief Program (TARP).

Wells Fargo did not mention the time period for exiting TARP, but mentioned that it will work closely with regulators to determine the appropriate time to repay the funds while maintaining strong capital levels.

In October 2008, the U.S. government injected more than $100 billion in the nation’s 9 largest banks through TARP, with Wells Fargo getting $25 billion. Government stress tests conducted in May concluded that Wells Fargo needed almost $14 billion in fresh equity capital, among the highest for any bank involved in the industry bailouts.

Though many banks have repaid TARP this year, Wells Fargo has yet to pay back the bailout money. Bank of America Corporation (BAC) has offered to repay $20 billion of its $45 billion in total government investment.

A number of banks, including Goldman Sachs Group Inc. (GS) and BB&T Corporation (BBT) have raised capital in recent months by issuing fresh common equity, a move that dilutes existing shareholders’ interest.

Wells Fargo’s second-quarter 2009 results indicated that its large exposure to California real estate has led to huge losses. Hence, an immediate capital raise might have allowed the company to repay TARP more swiftly and cover potential losses on its troublesome loan portfolio. However, Wells Fargo’s refusal to raise more capital to protect its shareholders interest comes as a positive for the stock.

In view of the above, we are maintaining our Hold recommendation on the shares.
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