Preferred stock rating downgraded to B2 from A2
New York, March 25, 2009 -- Moody's Investors Service lowered the senior debt rating of Wells Fargo
& Company (Wells Fargo) to A1 from Aa3, the senior subordinated
debt rating to A2 from A1, and the junior subordinated debt rating
to A3 from A1. The preferred stock rating was downgraded to B2
from A2. Wells Fargo's short-term rating was affirmed
at Prime-1.
Wells Fargo Bank N.A.'s rating for deposits was lowered
to Aa2 from Aa1, and its Prime-1 short-term rating
was affirmed. Moody's bank financial strength rating (BFSR)
on Wells Fargo Bank N.A. was lowered to D+ from B.
All ratings have a stable outlook except for the BFSR and preferred stock
rating where the outlook is "developing". These actions
conclude a review for possible downgrade that commenced on March 4,
2009.
Today's actions had no impact on the FDIC-guaranteed debt
issued by Wells Fargo. That debt remains rated Aaa with a stable
outlook.
"The downgrades of the BFSR and the preferred stock ratings reflect
Moody's view that Wells Fargo's capital ratios could come
under pressure in the short-term, increasing the probability
that systemic support will be needed," said Moody's
Senior Vice President, Sean Jones. "The moderate downgrades
of Wells Fargo's deposits, senior debt and senior subordinated
debt ratings are based on Moody's expectation of very high systemic
support for these instruments, and the view that such support will
enable the substantial value of its franchise to materialize in the medium
to long-term. Such support, however, could be
potentially harmful to preferred stock investors."
Today's rating actions are consistent with Moody's recent announcement
that it is recalibrating some of the weights and relative importance attached
to certain rating factors within its current bank rating methodologies.
Capital adequacy, in particular, is taking on increasing importance
in determining BFSRs in the current environment. Meanwhile,
debt and deposit ratings are expected to reflect higher support assumptions
for systemically important institutions during this global financial crisis.
(Please see Moody's special comment "Calibrating Bank Ratings in the Context
of the Global Financial Crisis.")
BFSR DOWNGRADE DUE TO LOW CAPITAL RATIOS
The downgrade of Wells Fargo Bank N.A.'s BFSR to D+
from B reflects the increased probability of systemic capital support
due to Moody's view that Wells Fargo's capital ratios could
fall to comparatively low levels. The factors contributing to the
potentially weak capital position are 1) its current ratios are relatively
low (Tier 1 at 7.84% and adjusted tangible common equity
ratio at 4.05%), and 2) Moody's view that Wells
Fargo could face sizable credit costs in the coming twelve to eighteen
months. Moody's notes that should Wells Fargo be able to
take these credit costs over a more extended period of time, given
its core earnings power, this could reduce its capital needs.
"The BFSR is driven by Wells Fargo's capital challenges,
which are made more acute because U.S. banks' access
to the equity market is shut or very limited at best," said
Moody's Mr. Jones. "This increases the likelihood
of a capital initiative by the U.S. government to support
Wells Fargo. The BFSR is intended to express an opinion about the
likelihood of such an event," explained Mr. Jones.
Wells Fargo's comparatively low capital ratios --
especially its tangible common equity ratio -- result from
its acquisition of Wachovia. In Moody's opinion, the
amount of equity that Wells Fargo raised was modest in comparison to the
amount and quality of assets it acquired from Wachovia.
Moody's does not expect Wells Fargo to generate sizable amounts
of capital until the second half of 2010, at the earliest,
for the following reasons. First, Wells Fargo will need to
take provisions and merger expenses -- predominantly in
2009 and into 2010 -- against those Wachovia assets that
were not marked down on December 31, 2008. Secondly,
a challenging housing market and higher unemployment will result in higher
loan-loss provisions for the legacy Wells Fargo portfolio.
Thirdly, additional charges beyond Wells Fargo's life-time
loss estimate of approximately 29% against the legacy Wachovia
option-ARM portfolio cannot be ruled out.
When evaluating Wells Fargo's ability to absorb losses, Moody's
incorporates additional mitigating factors other than Wells Fargo's
current capital position. These additional factors include:
1) the $37.2 billion mark it took against Wachovia's
loans, which it acquired at year-end 2008, 2) a high
proportion of Wells Fargo's credit-loss reserve, which
stood at $21.7 billion at year-end, which is
large in relation to its nonperforming assets, 3) 2008 charge-offs
it took against its residential and commercial real estate loans,
4) tax-effecting forecasted losses, and 5) an assumption
of high core profitability, which is reduced by Wells Fargo's
payments of preferred and common dividends that average about $711
million per quarter.
SYSTEMIC SUPPORT AND VALUABLE FRANCHISE BENEFIT DEPOSIT AND SENIOR DEBT
RATINGS
Moody's believes that despite Wells Fargo's capital challenges,
a more modest lowering of its deposit, senior, and senior
subordinated debt ratings was appropriate because Moody's assumes
that systemic support for Wells Fargo is very high and that its valuable
franchise will remain intact. "Wells Fargo would almost certainly
be a recipient of systemic support, given its importance to the
U.S. economy and financial system," said Mr.
Jones. Such support would likely benefit all depositors,
senior, and senior subordinated debt holders of the bank and the
bank holding company.
Moody's assumes that if systemic support were to be provided,
this would not result in changes to Wells Fargo's franchise,
which is viewed as very strong. Wells Fargo has a large presence
in direct banking in the U.S. supported by an effective
sales force. The banking franchise is supplemented by a large and
well-managed mortgage company and retail brokerage operations.
This business mix generates high core profitability, while also
providing it with a strong liquidity profile. Moody's also
assumes that Well Fargo has the expertise to successfully manage the sizable
merger with Wachovia.
GOVERNMENT SUPPORT COULD PROVE DETRIMENTAL TO PREFERRED SHAREHOLDER INTERESTS
The downgrade of the preferred stock rating to B2 from A2 was based on
Moody's view that if Wells Fargo were the recipient of capital support
from the U.S. government, that support may be accompanied
by the suspension of dividends, or even a distressed exchange by
which preferred investors may be compelled to exchange their preferred
stock for common stock. "With the capital markets essentially
shut down, the recent Citigroup recapitalization becomes a very
relevant reference point," said Mr. Jones. "While
Wells Fargo's preferred securities do not have any triggers that
would cause an automatic suspension of dividends, we believe that
in the event government support is provided, the U.S.
government could require Wells Fargo to suspend its common and preferred
dividends in order to preserve capital," Mr. Jones added.
A distressed exchange could be a way to increase common equity and limit
the size of the U.S. government's stake in the bank in the
event that support was required.
The developing rating outlook on the preferred stock rating and the BFSR
is in response to their sensitivity to both capital and asset quality
trends for the coming year. If Wells Fargo can build capital through
earnings or attract capital from investors then positive ratings pressures
emerge for both the preferred stock and BFSR. In contrast,
if Wells Fargo's capital ratios fall and there is no compensating
action taken then negative ratings pressures would likely emerge for both
ratings. Finally, the two ratings could move in opposite
directions, if Moody's felt that a suspension of preferred
dividends is more likely and that this would be accompanied by either
an equity infusion or a conversion of preferred into common. Such
an opinion could result in negative rating pressures on the preferred
stock rating but could be positive for the BFSR at the completion of the
capital initiative.
FURTHER NOTCHING FOR JUNIOR SUBORDINATED DEBT RATINGS
Moody's lowered the junior-subordinated debt ratings of Wells
Fargo to A3 from A1. The junior subordinated debt rating is one
notch lower than the senior subordinated debt rating of A2. Moody's
believes that the cumulative nature of the interest on such instruments
reduces the incentive to defer interest. However, the rating
incorporates the view if there is an unexpected need for further government
support, the risk of deferred payment on these instruments,
warrants an additional notche on the ratings of these instruments.
PREVIOUS RATING ACTION AND PRINCIPAL METHODOLOGIES
The last rating action on Wells Fargo was on March 4th, 2009 when
Moody's placed all of Wells Fargo's long-term ratings
and its BFSR under review for possible downgrade.
The principal methodologies used in rating this issuer were "Bank Financial
Strength Ratings: Global Methodology" (February 2007) and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology" (March 2007), which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found in the Credit Policy & Methodologies directory.
The following is a partial list of entities whose ratings have been affected:
Downgrades:
..Issuer: Wells Fargo & Company
....Issuer Rating, Downgraded to A1
from Aa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to a range of A2 to A1 from a range of
A1 to Aa3
....Multiple Seniority Shelf, Downgraded
to a range of (P)B2 to (P)A1 from a range of (P)A2 to (P)Aa3
....Preferred Stock Preferred Stock,
Downgraded to B2 from A2
....Preferred Stock Shelf, Downgraded
to (P)B2 from (P)A2
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to A1 from Aa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to A1 from Aa3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Wells Fargo Bank, N.A.
....Bank Financial Strength Rating,
Downgraded to D+ from B
....Issuer Rating, Downgraded to Aa2
from Aa1
....OSO Senior Unsecured OSO Rating,
Downgraded to Aa2 from Aa1
....Multiple Seniority Bank Note Program,
Downgraded to a range of Aa3 to Aa2 from a range of Aa2 to Aa1
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
....Senior Unsecured Deposit Note/Takedown,
Downgraded to Aa2 from Aa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Rating,
Downgraded to Aa2 from Aa1
..Issuer: Wachovia Corporation
....Junior Subordinated Shelf, Downgraded
to (P)A3 from (P)A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to a range of A2 to A1 from a range of
A1 to Aa3
....Multiple Seniority Shelf, Downgraded
to a range of (P)B2 to (P)A1 from a range of (P)A2 to (P)Aa3
....Preferred Stock Preferred Stock,
Downgraded to B2 from A2
....Preferred Stock Shelf, Downgraded
to (P)B2 from (P)A2
....Subordinate Medium-Term Note Program,
Downgraded to A2 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to A1 from Aa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to A1 from Aa3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A1 from Aa3
..Issuer: Wachovia Bank, N.A.
....Bank Financial Strength Rating,
Downgraded to D+ from B
....Issuer Rating, Downgraded to Aa2
from Aa1
....OSO Senior Unsecured OSO Rating,
Downgraded to Aa2 from Aa1
....Multiple Seniority Bank Note Program,
Downgraded to a range of Aa3 to Aa2 from a range of Aa2 to Aa1
....Multiple Seniority Medium-Term
Note Program, Downgraded to a range of Aa3 to Aa2 from a range of
Aa2 to Aa1
....Subordinate Bank Note Program, Downgraded
to Aa3 from Aa2
....Subordinate Conv./Exch.
Bond/Debenture, Downgraded to Aa3 from Aa2
....Subordinate Regular Bond/Debenture,
Downgraded to Aa3 from Aa2
....Senior Unsecured Bank Note Program,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Note/Takedown,
Downgraded to Aa2 from Aa1
....Senior Unsecured Conv./Exch.
Bond/Debenture, Downgraded to Aa2 from Aa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Aa2 from Aa1
....Senior Unsecured Deposit Rating,
Downgraded to Aa2 from Aa1
..Issuer: First Fidelity Bancorporation
....Preferred Stock Preferred Stock,
Downgraded to B2 from A2
..Issuer: WFC Holdings Corporation
....Preferred Stock Preferred Stock,
Downgraded to B2 from A2
..Issuer: Wachovia Preferred Funding Corporation
....Preferred Stock Preferred Stock,
Downgraded to B2 from A2
Outlook Actions:
..Issuer: First Fidelity Bancorporation
....Outlook, Changed To Developing From
Rating Under Review
..Issuer: Wachovia Preferred Funding Corp.
....Outlook, Changed To Developing From
Rating Under Review
..Issuer: WFC Holdings Corporation
....Outlook, Changed To Developing From
Rating Under Review
..Issuer: Wachovia Bank, N.A.
....Outlook, Changed To Stable(m) From
Rating Under Review
..Issuer: Wachovia Corporation
....Outlook, Changed To Stable(m) From
Rating Under Review
..Issuer: Wells Fargo & Company
....Outlook, Changed To Stable(m) From
Rating Under Review
..Issuer: Wells Fargo Bank, N.A.
....Outlook, Changed To Stable(m) From
Rating Under Review
Wells Fargo & Company is headquartered in San Francisco, CA
and its reported assets were $1.3 trillion as of December
31, 2008.
New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Sean Jones
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's lowers Wells Fargo (snr to A1 from Aa3)
