06.22.2012
By Terry Flanagan

Little Effect from Bank Downgrades

Despite the downgrading of 15 of the world’s largest banks by Moody’s, it does not appear that investors have been rattled by the downgrades, as many saw it coming and it had already been priced in. As of mid-day Friday, the banking sector had rebounded, shrugging off the news.

“From a stock perspective, we believe the conclusion of the review helps remove an overhang on U.S. bank stocks,” said Credit Suisse analyst Howard Chen.

“The actions have been well flagged, so investors, and the banks themselves, should not have been caught off guard,” said analyst Michael Symonds of Daiwa Capital Markets.

Moody’s downgraded the credit ratings of 15 of the largest banks in the world. Among those hit hardest were Spain’s La Caixa and France’s BNP Paribas, each downed multiple notches. Deutsche Bank, Barclays, HSBC, Credit Suisse, Royal Bank of Scotland, Credit Agricole, Societe Generale, Royal Bank of Canada and UBS were also downgraded. Stateside, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Bank of America and Citigroup were each downgraded as well. Of the big U.S. banks, only Wells Fargo went unscathed.

According to Moody’s, the firms that were affected all had exposure to Europe and derived a substantial portion of their businesses in some form from the financial markets, which have been going through a prolonged slowdown. Fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions were all considered in Moody’s decision.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Moody’s global banking managing director Greg Bauer said in a statement.

The majority of Wells Fargo’s operations is U.S.-based, with only 5% of its portfolio attributable to foreign loans.

While the Moody’s rating agency felt that the risky business practices of the offending banks warranted credit downgrades, the banks obviously disagreed with its findings, asserting that things are not the same as they were several years ago.

“While Moody’s revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken,” Morgan Stanley said in a statement.

“Moody’s approach is backward-looking and fails to recognize Citi’s transformation over the past several years,” said the Citigroup in a statement. The action by Moody’s “is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile,” said Royal Bank of Scotland in a statement. “The impacts of this downgrade are manageable.”

“To downgrade a BofA or Citigroup or companies that are sitting on hundreds of billions of dollars of cash in government-backed securities makes no sense,” Richard Bove, an analyst at Rochdale Securities LLC, said in a television interview.

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