UPDATE 1-S&P may cut Wells Fargo, Moody's outlook to negative

(Recasts, adds actions by Moody's and Fitch)

NEW YORK, Oct 3 (Reuters) - Standard & Poor's on Friday said it may cut its ratings on Wells Fargo & Co (WFC.N) and Moody's Investors Service changed the bank's outlook to negative after it said it would buy Wachovia Corp WB.N for about $16 billion.

Fitch Ratings affirmed its ratings on Wells Fargo after the news and raised Wachovia's rating back to investment grade. S&P also said it may raise Wachovia if the transaction is completed.

Wells Fargo's agreement apparently bested a government-backed Citigroup Inc (C.N) bid for some of the bank's assets. The deal would catapult Wells Fargo into the ranks of the leading national consumer banks. For details, see [ID:nN03460047]

The proposed acquisition by Wells Fargo "signals an increase in its risk appetite," Moody's said in a statement.

"The terms of the transaction would result in an increase in Wells Fargo's leverage and pose sizable integration risks at a time when it has to navigate its own asset quality pressures in a deteriorating economy," Moody's said.

A negative outlook indicates Moody's is more likely to cut Wells Fargo's ratings from "Aa1," the second-highest investment grade, over the next 12-to-18 months.

S&P said it may cut the bank from "AA-plus," also the second-highest investment grade.

The review for downgrade "reflects the uncertainty surrounding core earnings and capital levels after this acquisition closes and the integration issues related to the size and scale of Wachovia relative to Wells Fargo," S&P said in a statement.

"Also, this transaction comes in an operating environment characterized by consumer credit concerns, weak housing and mortgage markets, and increasing recessionary pressures in the U.S. economy," S&P added.

Fitch affirmed Wells Fargo at "AA," the third-highest investment grade.

WACHOVIA

Fitch raised Wachovia's rating eight notches to "A-plus," the fifth-highest investment grade, from "BB-minus," three steps into junk territory, and said it may raise the bank again.

The upgrade "reflects the reduced uncertainty regarding the credit-worthiness of the Wachovia holding company post-closing," Fitch said.

S&P placed Wachovia's ratings on watch "developing," indicating they could be raised, lowered or left unchanged at "BBB-minus," one notch above junk territory.

"If this transaction with Wells Fargo closes, we could raise our ratings on Wachovia Corp and its bank subsidiary, and equalize them to our ratings on Wells Fargo and its banking subsidiaries," S&P said.

If the deal does not close, Wachovia would likely be put back on review for downgrade into junk territory. (Reporting by Karen Brettell; Editing by Dan Grebler)