Wells Fargo & Co.'s principal banking subsidiary was upgraded to Aaa from Aa1 by Moody's Investors Service on Thursday, the first time since 1995 that a rating agency has given a U.S. bank its top grade.
The holding company was also upgraded, to Aa1 from Aa2. Moody's cited Wells' consistently stable earnings and business diversification.
The upgrade gives the San Francisco company and its chairman, Richard Kovacevich, bragging rights among the big banks that were on the bubble for a bump up. Citigroup Inc., Bank of America Corp., and Fifth Third Bancorp have also been contenders.
"It's fabulous," Mr. Kovacevich crowed in a telephone interview shortly after the afternoon announcement. The new rating will be "very meaningful to our customer base, both consumer and commercial," he said.
The action "speaks volumes about their confidence in Wells' ability to earn throughout the [mortgage banking] cycle," said Steven Wharton, an analyst with Loomis, Sayles & Co.
Others disagreed. This "was not the right move," said David Hendler, an analyst with CreditSights Inc. Moody's "should have upgraded Citi" because it is far more diversified and larger than Wells.
The last bank to have the coveted rating was Morgan Guaranty Trust Co., the banking subsidiary of the former J.P. Morgan & Co., which held on until early 1995, when Moody's cut it.
Wells may have won out because of difficulties at its rivals.
Fifth Third, which last year was rated Aa1 with a "positive" outlook lost that status earlier this year when it entered into a written agreement with the Federal Reserve Board over its risk management, said Moody's analyst David Fanger. Citi has also remained at Aa1 because of regulatory scrutiny for its investment banking practices.
Wells has consistently generated stronger and more stable earnings than Bank of America, Mr. Fanger noted. Of course, now the Charlotte company is also embroiled in a scandal, involving trading in its mutual fund unit.
Wells "is not subject to any form of agreement with any regulators at present. Our view is that this is in partly because it is a simpler business model, but it clearly a strong culture and good controls," Mr. Fanger said.
The upgrade comes at a critical time for Wells. Some analysts and investors are doubtful that it can sustain profits because it is such a heavy hitter in mortgages at a time when that sector is cooling. Mortgage rival National City Corp. told investors that third-quarter earnings could suffer because of the rise of the 10-year Treasury.
But Mr. Fanger from Moody's said the mortgage business makes up a larger share of National City's business and that Wells is better positioned to handle the fallout.
Mr. Kovacevich said, "This is the third cycle that we have been through, and over the 10 years we had that kind of [solid] consistency in profits."
