Wells Fargo’s play for prime brokerage prompts skepticism

As Wells Fargo becomes a bigger player in the investment banking game, not everyone is a fan.

Moody’s Investors Service, the rating agency, raised concerns on Monday about the bank’s recent move outside its comfort zone of consumer lending. Moody’s directed criticism at the bank for stepping into prime brokerage, calling the bank’s recent acquisition of the midsize company Merlin Securities “credit negative.”

Wells Fargo agreed to buy Merlin last month for an undisclosed sum, making it the last of the nation’s biggest banks to enter prime brokerage, the lucrative business that caters to hedge funds and other big investors. Prime brokers provide a broad array of services, including cash management, execution of leveraged trades and securities lending.

Moody’s expressed concern the Merlin takeover “signals that Wells Fargo intends to expand its” investment banking business. “Though Merlin is small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services,” Moody’s said in the report.

Fitch, one of Moody’s top competitors, offered a softer interpretation of the deal. While Wells Fargo “may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature,” Fitch said last week.

In a statement, Wells Fargo defended the deal and challenged the Moody’s assessment.