Moody’s Issues Rating Downgrade Warning For 17 Banks

The credit rating agency Moody’s announced late Wednesday that it is reviewing the ratings of 17 banks and securities firms with sizable global capital markets operations and the market simply looked the other way. At least that is what the jump in stock prices for banks on Thursday indicates. ^[1] Morgan Stanley (NYSE:MS) and the Swiss banks UBS (NYSE:UBS) and Credit Suisse (NYSE:CS) could see their credit ratings fall the most – by 3 notches.

But the market just shrugged off this threat with the KBW Bank Index rising more than 2% over the day. Shares of Bank of America (NYSE:BAC) continued their rally to rise an additional 4% over the day, and the Swiss banks gained a healthy 3%. And all this when Moody’s declared that the average credit rating of the 17 financial institutions would reduce from ‘A2’ into the ‘Baa’-range – barely leaving in the investment-grade category.

See our full analysis for Morgan Stanley | Bank of America | UBS | Credit Suisse

We believe there are 3 sound reasons that explain the behavior of investors to Moody’s announcement:

Investor Optimism over Unemployment Data and Greece Eclipsed the Downside Afforded By Moody’s Announcement

U.S. economic data turned out to be better-than-expected, as jobless claims in the country last week fell to the lowest in nearly 4 years. Investors are also optimistic about a second bailout package for Greece, which has evidently pushed prices of European banks higher over trading.

Investors Already Expected A Downgrade Warning From Moody’s

Earlier this week, Moody’s downgraded the debt ratings of 6 European countries, and changed the outlook on ratings for 3 others to negative. This decision was anyway expected to result in a downgrade in ratings for banks which had a sizable exposure to European markets. We wrote about this earlier in our article, Moody’s Likely To Downgrade All Major Banks Due to Euromess.

Rating Downgrades & Warnings Have Become Too Frequent For Investors to Pay Serious Heed To Them

In recent months, there have been a considerably large number of ratings downgrades and warnings issued by the three major credit ratings firms – S&P, Moody’s and Fitch – in relation to the European debt crisis. The sheer volume of such announcements has arguably resulted in investors developing a sort of immunity towards these announcements. Such announcements are driving share prices to a much lower extent in the recent past, than they did months ago.

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1. Moody’s reviews ratings of global investment banks, Moody’s Press Release, Feb 15 2012 [↩]