Wachovia Shouldn't Slow Wells Fargo Down

According to Wachovia's third-quarter earnings statement, its exposure to the troublesome "Pick-a-Payment" loans totals $118.7 billion as of Sept. 30. Wells Fargo has said it anticipates about $74 billion in losses and mortgage-related writedowns following the merger. About $39 billion of that should be recognized at the deal's close, and then the remainder is expected to be charged off incrementally over the course of 2009 and 2010, said Credit Suisse analyst Todd Hagerman.

If the housing market continues to deteriorate, however, even that aggressive writedown forecast may prove insufficient. Further declines in home prices would accelerate charge-offs from Wells, yielding an unpleasant surprise for shareholders.

Wells' healthy cash position should offer some cushion. Following the announcement of the Wachovia deal, the company quickly raised $11 billion in a common-stock offering. The $25 billion preferred equity stake the bank sold the federal government through the $700 billion Troubled Assets Relief Program further bolstered its balance sheet.

Although Wells Fargo no longer boasts the highest possible credit ratings, agencies such as Fitch, Standard & Poor's and Moody's continue to rank the company among the top in its industry.

On Friday, Fitch Ratings affirmed Wells Fargo's Issuer Default Rating at AA following the Wachovia deal's close, saying that although the Wells will likely see declines in its asset quality over the near term, it "is well-positioned to absorb the associated credit losses." Fitch also said Wells is highly capable of integrating its acquisitions and that it should rebound from short-term deterioration in its capital ratios.