New York, November 18, 2009 -- Moody's Investors Service upgraded its unsupported bank financial strength
rating (BFSR) on Wells Fargo & Company's bank subsidiaries to C from
C- (for a baseline credit assessment of A3, up from Baa2).
The upgrade reflects continued improvement in the bank's capital
position, driven by stronger-than-expected earnings
year-to-date and the effects of a capital raise earlier
At the same time, Moody's upgraded the bank's non-cumulative
preferred stock rating to Ba1 from Ba3, while downgrading its junior
subordinated debt to Baa2 from A3.
These changes follow the rating agency's new methodology in effect
on November 17th 2009 for rating such instruments. The result of
this change for ratings on both types of securities would be negative,
as it eliminates the assumption that such instruments would benefit from
government support, should such support be needed. However,
in the case of Wells Fargo, the bank's preferred stock had
previously been rated with an assumption of a higher likelihood of preferred
dividend suspension. The bank's strengthened capital position
noticeably reduces such a risk, justifying a move to the new methodology
and, allowing the preferred stock to be rated by notching off of
the now-higher BCA.
The bank's deposit rating remains unchanged at Aa2 and the holding
company's senior debt, senior subordinated debt, and
short-term ratings remain unchanged at A1, A2, and
Prime-1, respectively. These ratings already benefit
from sizable lift above the level of the bank's stand-alone
financial strength, incorporating Moody's assumption that there
is a very high probability of systemic support for Wells Fargo,
should such support be needed and that its valuable franchise will remain
intact post the current credit crisis.
These actions had no impact on the FDIC-guaranteed debt issued
by Wells Fargo, which remains at Aaa with a stable outlook.
The rating outlook on the BFSR and hybrid securities is positive,
while the rating outlook on all other ratings is stable.
SUSTAINED HIGHER CAPITAL RATIOS DRIVE BFSR UPGRADE
The upgrade of Wells Fargo's BFSR to C from C- was in response
to continued improvement in the company's capital position,
after it leveraged itself noticeably when making the Wachovia acquisition.
Moody's had previously raised the BFSR to C- from D+
in May and placed a "developing" outlook on the rating to
reflect its sensitivity to Wells Fargo's capital trends.
An $8.6 billion equity issuance earlier this year has helped
drive the capital improvement, as has $5.7 billion
of internal capital generation in the first nine months of 2009 from stronger-than-expected
earnings and comparatively modest dividend payments. Regulatory
capital also benefited from a $6 billion deferred tax asset realization.
The larger capital base resulted in Wells Fargo reporting a Tier 1 ratio
of 10.6% and a Tier 1 Common Equity ratio of 5.2%
as of September 30, 2009. Its Moody's Equity ratio,
which gives some credit to hybrid securities, was approximately
7.1%. These ratios are much higher than the December
31, 2008 ratios of 7.8%, 3.1%,
and 4.5%, respectively.
"The increased capital is an important credit issue because it provides
a cushion against the large credit costs that we think Wells Fargo will
have to absorb over the coming quarters," said Moody's
Senior Vice President Sean Jones. "Residential mortgages
and commercial real estate exposures make up nearly 60% of Wells
Fargo's loans, and we expect losses in these sectors to grow well
The upgrade of Wells Fargo's BFSR assumes that it will continue
to report strong capital ratios even given such losses. However,
under a more severe economic scenario, Wells Fargo could suffer
significantly higher credit losses and greater capital depletion.
While Moody's views this scenario as unlikely, the BFSR upgrade
was limited to a rise to C from C- in order to reflect the risks
associated with a more severe economic forecast.
"When evaluating Wells Fargo's ability to absorb losses, Moody's
incorporates additional mitigating factors beyond Wells Fargo's current
capital position," Mr. Jones observed.
These additional factors include: 1) the $40.1 billion
purchase accounting mark it took against Wachovia's loans, which
it acquired at year-end 2008, 2) a sizable proportion of
Wells Fargo's loan loss reserve, which stood at $24 billion
at September 30, 2009, 3) an ability to tax-effect
forecasted losses, and 4) an assumption of quite high core earnings,
which are reduced by Wells Fargo's payments of preferred and common dividends
and accretion of the TARP discount that average about $838 million
The positive rating outlook on the BFSR reflects that if the nascent economic
recovery takes hold, it would minimize the risk of Wells Fargo incurring
an appreciable spike in credit costs and thus solidify its improved capital
The positive outlook also incorporates an assumption that if Wells Fargo
were to pay back its $25 billion of TARP to the U.S.
government, it would be done in such a manner as to have a limited
negative impact on Wells Fargo's Tier 1 capital ratio and no material
impact on its Tier 1 Common and Moody's Equity ratios.
HIGHER BFSR , NEW METHODOLOGY DRIVE HYBRID RATINGS
Moody's ratings on Wells Fargo's junior subordinated and preferred
stock incorporate today's upgrade to the company's BFSR/BCA,
as well as the rating agency's revised methodology for rating hybrid
capital securities. (See "Moody's Guidelines for Rating
Bank Hybrid Securities and Subordinated Debt," November 2009,
for more details.)
The revised methodology removes any ratings benefit due to systemic support
for such instruments -- effectively making the baseline credit assessment
(BCA) the "anchor" rating for notching these instruments.
PREVIOUS RATING ACTION AND RATING METHODOLOGY
Moody's last rating action on Wells Fargo was on May 14, 2009 when
its BFSR was raised to C- from D+, and its preferred
ratings were raised to Ba3 from B2.
The principal methodologies used in rating this issuer are Moody's "Bank
Financial Strength Ratings: Global Methodology" published in February
2007, and "Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: A Refined Methodology" published in March 2007 and
available on www.moodys.com in the Ratings Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Ratings Methodologies
sub-directory on Moody's website.
Wells Fargo & Company is headquartered in San Francisco, and
its reported assets were $1.2 trillion as of September 30,
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Moody's upgrades Wells Fargo BFSR, pref stock; downgrades jr sub debt
Gregory W. Bauer
Financial Institutions Group
Moody's Investors Service