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Wells Fargo Ratings Affirmed by Moody's, Outlook Raised

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Moody's Investors Service, a rating arm of Moody's Corporation (MCO - Free Report) , recently affirmed all the ratings of Wells Fargo & Company (WFC - Free Report) and its subsidiaries. Notably, the outlook has been raised from negative to stable.

The Wall Street biggie’s senior debt rating has been affirmed at A2, senior debt rating at Aa2 and subordinated debt rating at Aa3. The bank’s deposit rating is Aa1/Prime-1 and standalone baseline credit assessment (BCA) stands at a2. The bank’s subsidiary has an Aa2 senior debt rating and an Aa3 subordinated debt rating, and its counterparty risk assessments are Aa1(cr)/Prime-1(cr).

Reasons Behind Affirmation

Wells Fargo’s strong balance sheet backed by capital strength, liquidity and credit quality supported Moody’s decision to affirm ratings. Also, several investments toward corporate risk management and compliance functions to remove the loopholes that have dragged attention from regulators.

Per Moody’s, progress in Wells Fargo’s balance sheet post fake accounts scandal in September 2016 is commendable. Also, consumer banking financial metrics have been stable, liquidity seems robust and it passed the Fed's annual bank stress test successfully, which indicates its stability.

The ratings agency expects appointment of the new CEO to not affect its risk profile. Also, Wells Fargo’s ability to serve core retail and commercial clients without exceeding the asset cap imposed by the Fed in February 2018 impressed Moody’s.

However, Moody’s remains apprehensive of Wells Fargo’s exposure to litigations on account of prior sales practices and risk and compliance shortcomings, which can cause reputational damage. Also, it is of the opinion that the bank will be hit with a multi-billion-dollar cost to settle all outstanding governmental investigations.

Further, if Wells Fargo is unable to satisfy the Fed's requirements for lifting the asset cap in the next year or two, Moody’s believes that it could result in deeper risk management and governance deficiencies and will push ratings agency to review the firm's ratings and outlook.

What Can Trigger Change in Ratings?

Upward rating pressure can be created from significantly stronger profitability metrics, a healthy balance sheet and the successful resolution of all legacy issues.

However, management's inability to correct the firm's governance and risk management deficiencies could result in downward ratings movement. Also, any noticeable franchise erosion, such as a loss of deposits, or an outsized spike in nonperforming assets would also affect the ratings.

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