It turns out that, for now at least, acquiring ailing financial institutions will carry some ratings risk — Moody’s Investors Service on Thursday said it had downgraded key credit ratings at both Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), after both banks completed sizable acquisitions in recent weeks. Ratings cuts affected debt ratings, as well as financial strength ratings at the lead banks. Bank of America completed its acquisition of Merrill Lynch & Co., Inc. on Jan. 1, while Wells completed its own acquisition of Wachovia Corp. this week; both Merrill and Wachovia maintained significant exposure to the nation’s ailing mortgage markets. “Bank of America has taken a number of steps recently to bolster its capital position,” said Moody’s senior vice president David Fanger, “but we believe that its pro forma tangible common equity position remains relatively weak, leaving a modest cushion to absorb unexpected losses.” Moody’s analysts noted that as of Sept. 30, BofA’s aggregate exposure to credit cards and residential mortgages was roughly $660 billion, and said that the combined company also remains exposed to potential further write-downs in legacy structured assets from both predecessors. Resultant weak earnings, along with still-sizeable dividend payments, are expected to constrain BofA’s ability to reduce leverage, the ratings agency said. And in an environment where de-leveraging is the new black, that certainly poses some challenges. Moody’s also expressed some concern over BofA’s ability to successfully integrate Merrill with its own operations. “Investment banking and wealth management businesses are heavily reliant on their personnel and their client relationships. This increases the risk of customer defections and franchise impairment as a result of a poor integration,” Fanger said. Read Moody’s statement. BAC shares were at $13.47, down 1.75 percent, when this story was published. Wachovia to drag on Wells Similar to BofA, Moody’s also expressed concern that leverage will not improve at Wells Fargo before 2010 because the company will need to sustain high loan-loss provisions in the wake of its acquisition of Wachovia — and said its downgrades would have been even steeper without its assumption of “a very high probability of systemic support from the U.S. government.” Moody’s cited “asset quality concerns” in lowering the bank’s financial strength rating to B from a previous rating of A, and said it believes that after the acquisition, Wells Fargo’s Tier I ratio and its adjusted tangible equity to risk weighted assets ratio will be noticeably lower than their levels at the end of Q3. “The fall in Wells Fargo’s tangible equity ratio results from the fact that the equity it raised was low in comparison to the amount and quality of the Wachovia assets it acquired,” said Moody’ssenior vice president, Sean Jones. Portfolios where Moody’s said it believes higher provisions will need to be taken include Wells Fargo’s $153.5 billion residential mortgage book, its $64 billion commercial real estate portfolio, its $27 billion auto finance book, and its $20 billion credit card portfolio. Read the full statement. Shares in WFC were at $25.52, down 1.35 percent, when this story was published. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.