Late last week, credit rating agency Moody’s announced that it has completed its review of eight of the country’s biggest bank holding companies which began in August, and is downgrading the credit rating of four of the banks.  Moody undertook the review to understand how the declining prospects of banks being bailed out by the U.S. government in the event of financial distress affects its credit ratings for these banks (see Moody’s Threatens Another Round Of Ratings Cut For U.S. Banks).
The banks that saw their ratings downgraded by one notch were Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and Bank of New York Mellon (NYSE:BK), while Wells Fargo (NYSE:WFC), State Street (NYSE:STT), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) escaped that fate. Notably, this news did not impact the share prices for these banks much. While this could be because the news had already been priced into the share prices over the recent months, bank stocks are starting to seem relatively immune to downgrade announcements – especially since late 2011, when ratings agencies announced a string of downgrades in bank ratings in quick succession.
U.S. banks have seen a series of downgrades since the economic downturn, with some banks – such as Bank of America and Citigroup – being downgraded by as many as 7 notches from their peak ratings in late 2008. The table below summarizes the long-term credit rating for these eight banks – per Moody’s – before the commencement of, and at the end of the review. Ratings that were changed have been highlighted.
|Bank||Old Rating||New Rating|
|Bank of America||Baa2||Baa2|
Moody’s initiated its review in the wake of an increasing focus by the U.S. government on policies that aim to reduce support for the banking giants during a financial crisis. Incidentally, Moody’s had downgraded the credit ratings for three of these banks – Bank of America, Citigroup and Wells Fargo – in September 2011, stating the same reason: the growing unwillingness of the U.S. government to bail out large banks in trouble (see Moody’s Sizes up Gov’t Support in Downgrades: BofA, Wells Fargo & Citi Slump). So with this recent set of downgrades, Moody’s has in effect cut the credit ratings of 7 of the 8 banks named within two years, owing to lower perceived government support.
A downgrade by credit rating agencies normally makes it more costly for a company to raise capital due to the higher perceived risk associated with a company having a lower rating. It remains to be seen whether the other rating agencies – Standard & Poor’s and Fitch – undertake a similar review, as similar downgrades would force the banks to pledge more collateral to existing loans and to also close out various derivatives contracts after shelling out termination penalties.
To put things in perspective, JPMorgan stated in its 10-Q filing for Q3 that it may have to post $947 million as extra collateral and cough up $673 million to settle contracts if its credit rating falls one notch. In the case of Morgan Stanley, a one-notch downgrade would result in additional collateral of $284 million, whereas for Goldman Sachs the figure is a much steeper $1.9 billion.Notes: