S&P downgrades Wells Fargo

Standard & Poor's said it lowered its long-term counterparty credit rating on Wells Fargo & Co. and its subsidiaries one notch to AA from AA+, affirmed the A-1+ short-term rating on Wells Fargo and removed the long-term ratings from CreditWatch negative, where they were placed on Oct. 3.

The outlook is negative.

The agency said the rating action reflects its more negative view regarding bank industry risk and losses, both of which are greater than S&P previously believed. Now that a longer global recession is more probable, S&P expects higher levels of stress for financial institutions than those experienced during a typical business-cycle trough.

In particular, the agency expects that Wells Fargo will experience lower profitability due to higher credit losses and related expenses in its residential mortgage, credit card and residential-related commercial real estate portfolios, plus the merger expenses and integration risks associated with its pending merger with Wachovia Corp., which is expected to close in December.

Wells Fargo benefits from lower funding costs and strong growth in core deposits and non-interest-bearing deposit growth, especially in light of the significant flight to quality the bank has experienced in the second half of 2008 for both its retail and institutional funds, S&P noted.

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