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Moody's cuts credit ratings on 15 major banks

Published June 22, 2012 8:33 am

Debt • In long- anticipated action, agency says their outlooks grow dimmer.
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New York • Moody's Investors Service lowered the credit ratings of 15 the world's largest banks late Thursday, including Bank of America, JPMorgan Chase and Goldman Sachs, saying their long-term prospects for profitability and growth are shrinking.

The ratings agency said it was especially concerned about banks with significant financial markets businesses because those markets have become so volatile. Some of the largest European banks were also downgraded, including Barclays, Deutsche Bank and HSBC.

The downgrades mean Moody's is more concerned about the ability of the banks to repay their debts. Moody's had said in February that it was considering downgrading the credit ratings of major banks in the U.S. and in Europe.

A downgrade usually means that it becomes more costly for banks to raise money by selling debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. However, with interest rates already at rock-bottom levels, the downgrades may not affect the cost of funding for the banks that much.

The stock market has also priced in any negative impact from the ratings downgrades, according to Bert Ely, a banking consultant in the Washington, D.C. area. "They've been telegraphing this thing for months," Ely said.

In a sign that investors were taking the news in stride, stocks of major U.S. banks rose in after-hours electronic trading. Moody's made its announcement after regular stock trading had closed. Morgan Stanley rose the most, 3.3 percent, gaining 45 cents to $14.41. JPMorgan Chase rose 41 cents to $35.92 and Bank of America rose 12 cents to $7.94.

The downgrades come at a time of great uncertainty in the global economy. Europe's currency union is under threat from bad bank loans. The U.S. economy is slowing and the fast-growing emerging economies of India, Brazil and China are also cooling. Financial markets have also been volatile.

On Thursday the Dow Jones industrial average plunged 251 points, its second-worst loss of the year, as new reports indicating slower manufacturing in the U.S. and China made investors fearful that the global economy could be heading for another slump.

Moody's has been on a downgrading spree lately. In June, it downgraded Spain by three notches, after downgrading 16 Spanish lenders in May. It also cut the ratings on seven German and three Austrian lenders in June.

In its latest report, Moody's didn't treat all large banks alike. It sorted the banks it was downgrading into three categories, with JPMorgan, HSBC, and Royal Bank of Canada in the top one.

Moody's said those firms have stable businesses that offset losses from the volatile markets businesses. JPMorgan, for example, has a large base of consumer deposits and major lending, credit card and asset management businesses.

These banks have also managed to contain their exposure to risky European government debt, Moody's said. While all three were downgraded, their debt had the highest ratings among the 15 banks affected.

The second group included Goldman Sachs, Deutsche Bank and Credit Suisse. Moody's said these firms rely heavily on their markets businesses to satisfy their shareholders, although some of them managed their risk effectively.

In its last group were the weakest banks — Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland. Moody's said these banks have either had "problems in risk management or have a history of high volatility," and some of them have implemented business strategy changes.

"These transformations are ongoing and their success has yet to be tested," Moody's said.

Citigroup said in a statement that it "strongly disagrees" with Moody's assessment. Citi said it doesn't believe the downgrade will impact the bank's funding costs because the ratings actions have already been expected by the market and its business partners have included them in their analyses. Morgan Stanley also disagreed with Moody's action.