Moody’s Sizes up Gov’t Support in Downgrades: BofA, Wells Fargo & Citi Slump
Almost three months after hinting at a downgrade in the ratings for three of the largest banks in the U.S. – Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) – Moody’s Investor Services went ahead and announced the downgrade yesterday. [1] Bank of America saw a significant hit with the bank’s long-term senior debt rating falling two notches from A2 to Baa1 with a negative outlook – indicating further potential downgrades in the near future. [2] The short-term debt ratings for both Bank of America and Citigroup fell a notch, from Prime-1 to Prime-2, while Wells Fargo took a cut on its long-term senior debt rating from A2 to A1.
Moody’s stated that the growing unwillingness of the U.S. government to bail out large banks in trouble is the primary reason for the downgrades. The banks were, unsurprisingly, not happy with the downgrades which reflect a change in Moody’s view of government support to banks – rather than a change in the health of these banks.
We currently have a price estimate of $11 for Bank of America’s stock, $48 for Citigroup’s stock and $32 for Wells Fargo’s stock – which we are reviewing in light of the weak global economic conditions aggravated by the string of lawsuits concerning the banks.
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Mortgages Did Bank of America In, Again
Moody’s admitted that Bank of America can blame the significant cuts it faces in its ratings to the uncertainty in costs associated with its legacy mortgage portfolio,and the growing number of major lawsuits against it. While investors are already concerned about the quality of mortgage portfolios Bank of America acquired from Countrywide and Merrill Lynch, the legal opposition to its $8.5 settlement toward 530 mortgage-securitization trusts is adding to investor fears. [3]
What This Means for the Banks
A downgrade by credit rating agencies normally makes it more difficult for a company to arrange for more cash – with the sources proving more costly due to the higher perceived risk associated with a company having a lower rating.
Citigroup walks away from the downgrade almost unscathed, as short-term debt contributes to less than 1% of its funding, and will hence have a negligible impact on the bank’s costs. [1]
On the other hand, if other rating agencies like Standard & Poor’s and Fitch take a cue from this downgrade and go ahead with making similar downgrades to Wells Fargo and Bank of America, the banks may end up pledging more collateral to existing loans and may also have to close out various derivatives contracts by shelling out termination penalties.
See our full analysis of Bank of America | Citigroup | Wells Fargo
Notes:- Moody’s downgrades big banks on changed policy, Reuters, Sept 21 2011 [↩] [↩]
- BofA, Wells Fargo Cut by Moody’s on Waning U.S. Support, Bloomberg Businessweek, Sept 21 2011 [↩]
- BofA $8.5 Billion Mortgage Bond Deal Defended by Investors in U.S. Court, Bloomberg, Sept 22 2011 [↩]