S&P upgrades Wachovia on hopes for Wells Fargo deal

NEW YORK (Reuters) - Standard & Poor's on Friday upgraded its counterparty credit rating on Wachovia Corp after Wells Fargo & Co said it is pushing ahead with plans to acquire the bank.

S&P raised the rating a full five notches to "A-plus," or fifth-highest investment grade, from "BBB-minus," or just one notch above speculative grade.

The agency said it is revising its outlook on the rating to "positive" from "developing," meaning it could upgrade again within two years.

S&P said it is keeping Wells Fargo (WFC.N) on review for a possible downgrade where it was first placed on October 3.

The action comes after Citigroup (C.N) late Thursday said it is backing away from talks with Wells Fargo over Wachovia WB.N.

Citigroup had agreed last week to buy Wachovia's banking assets for about $2.2 billion with partial government support. But days later, Wells Fargo upset that deal by negotiating a separate agreement to buy all of Wachovia for about $15 billion and no government backing.

Citigroup has promised legal action against Wells Fargo and Wachovia.

S&P said a Wells Fargo takeover of Wachovia would be a positive, noting that it has the approval of both management boards.

"We believe that this acquisition would greatly enhance the geographic span of Wells Fargo's banking franchise," analyst Victoria Wagner said in a note.

"Wells Fargo would emerge as the nation's largest core deposit banking institution."

If the transaction goes through as planned, S&P may raise ratings on Wachovia and it's banking units to match them to its ratings on Wells Fargo.

Meanwhile, Wells Fargo's ratings remain on watch to reflect uncertainty about earnings and capital levels after the deal closes.

(Reporting by Ciara Linnane; Editing by Diane Craft)