DBRS Confirms Wells Fargo Senior Debt at AA, Changes Trend to Negative Following the Acquisition of Wachovia Corporation

DBRS has today taken a number of actions following the completion of the Wells Fargo & Company (Wells or the Company) acquisition of Wachovia Corporation (Wachovia) in an all-stock transaction. Wachovia has ceased to exist as a legal entity; consequently, its ratings have been upgraded and are concurrently withdrawn. Wachovia entities and obligations have been upgraded as they are equalized with the current Wells ratings. All outstanding debt obligations of the holding company have now become the full risk and responsibility of Wells.

The long-term ratings of Wells Fargo & Company and its main subsidiary, Wells Fargo Bank, N.A., have been confirmed at AA and AA (high), respectively, concluding the Under Review with Negative Implications status initiated on October 3, 2008. All trends are Negative, with the exception of the Stable short-term R-1 (middle) ratings of Wells Fargo & Company, Wells Fargo Financial Canada and Greater Bay Bancorp and the Stable R-1 (middle) Commercial Paper rating of Wachovia Capital Finance. The short-term ratings of Wells Fargo Bank, N.A. and Wachovia Bank, N.A. have been confirmed at R-1 (high) with a Negative trend. All debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) remains at AAA with a Stable trend.

Moreover, DBRS has revised the support assessment (SA) for Wells Fargo & Company, Wells Fargo Bank, N.A., Greater Bay Bancorp and Wachovia Bank, N.A. to SA2 from SA3, which reflects their position as systemically important financial institutions and DBRS’s expectation that these entities would continue to receive systemic external support from the U.S. government in the current environment.

The DBRS rating confirmations reflect a powerful Wells franchise that continues to generate some of the industry’s strongest recurrent core earnings and organic growth, delivered through a robust product offering and disciplined sales force focused on deepening customer relationships. This consistently executed formula, coupled with good expense control, which has generated positive operating leverage, has produced double-digit returns on equity and compound annual growth rate (CAGR) income before provisions and taxes for more than a decade. Although DBRS expects earnings to slow and credit costs to grow in the difficult current operating environment, Wells is likely to continue to outperform most of its peer banks. Moreover, the transformational acquisition of the former Wachovia franchise, with its reputation for superior customer service, significantly broadens and deepens the Company through an extensive and demographically favorable southeastern operating footprint. The combined Company will be the leading depository bank in 18 states and the secondary one in an additional six. DBRS believes that the goal of selling the Wells product set and employing its cross-selling discipline to Wachovia’s customers presents a vast medium- to long-term opportunity for the Company.

The Negative trend reflects the increase in near- to medium-term risk to the Company at a time of substantial turmoil in the credit and capital markets. DBRS expects that the Company’s earnings will be somewhat pressured by deteriorating credit quality and rising credit costs, primarily driven by declining housing prices. The macroeconomic picture has also darkened in the past quarter as the U.S. economy, already well into a recession, tries to stem rapidly rising unemployment as a new administration begins its term in office. Although the newly merged Company’s revenue base is well diversified, consumer and commercial credit quality is expected to decline going into 2009 and constrain earnings.

In the midst of a deteriorating economy and disrupted financial markets, Wells is acquiring Wachovia, which significantly increases its exposure to stressed assets. In addition to the Company’s relatively well-controlled consumer and commercial lending exposures, Wachovia brings substantial exposure in its $482 billion loan book to investment banking assets, option adjustable-rate mortgages (ARMs) and home equity and other loans. Although managed down previously and written down substantially at closing through purchase accounting adjustments, these assets remain at risk for potential further losses should markets continue to deteriorate. In addition to integration risks for the Company, Wachovia may also face material costs of legal disputes and be subject to regulatory inquiries that could have an impact on its business and distract management. The scale and scope of the Wachovia integration and associated re-training given its 3,300 branches will require every bit of the Company’s extensive integration experience. Moreover, Wells is acquiring a substantial retail brokerage, with nearly 22,000 brokers, representing a much more significant foray into retail asset management than in the past. These near- to medium-term challenges, combined with the current financial turmoil and capital market disruptions, present headwinds sufficient to assign a Negative trend. Declining financial performance, including deteriorating credit quality and profitability, or a troubled integration could lead to negative rating actions, while credit cost stabilization, continuing strong profitability and a successful integration could restore the trends to Stable.

To date, Wells has been a recipient of the flight to quality, with $24 billion of liquidity-enhancing deposit inflows in Q3 2008, as well as being a beneficiary of the U.S. Treasury’s many liquidity programs. Furthermore, the Company received $25 billion as one of the first Troubled Asset Relief Capital Purchase Program (TARP CPP) recipients, which has elevated its capital ratios, offsetting some pressure from the transaction. Importantly, Wells was able to raise more than $12.6 billion of common equity, a significant validation in an otherwise hostile capital market environment. Nonetheless, DBRS will be looking for the Company to rebuild its tangible capital levels to more normalized levels as a confirmation of its financial strength as reflected in its ratings level.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.