By Dakin Campbell - Nov 30, 2011 6:32 AM GMT+0700
Nov. 30 (Bloomberg) -- Tom Quarmby, a Hong Kong-based analyst at Barclays Capital, talks about the U.S. and China's banking industries. Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders. Quarmby speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Nov. 29 (Bloomberg) -- William Cohan, a Bloomberg contributing editor and author of "Money and Power: How Goldman Sachs Came to Rule the World," talks about the move by Standard & Poor's to cut the long term credit grades of Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. to A- from A after the ratings firm revised criteria for dozens of the world's biggest lenders. He speaks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.
S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd. (1398), giving all three lenders higher grades than most big U.S. banks.
The moves may increase pressure on firms already dealing with weak economies and Europe’s mounting sovereign debt crisis. Lenders including Bank of America, Citigroup and Morgan Stanley have said they may have to post billions of dollars of additional collateral and termination payments on trades because of a one-level downgrade in their credit ratings.
“It’s evident that stress from the European banking system is taking its worldwide toll,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an e-mail.
The ratings firm also downgraded UBS AG (UBSN) and Barclays Plc (BARC) to A from A+, and HSBC Holdings Plc (HSBA) to A+ from AA-, according to the report.
Change in Technique
S&P, a unit of New York-based McGraw-Hill Cos. (MHP), has been changing the way it looks at debt after its faulty grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc. and Bear Stearns Cos. It started to review the methodology in December 2008, months after the collapse of those two firms.
Most bank stocks were little changed in after-hours trading. Bank of America fell 4 cents to $5.04, while Citigroup dropped 19 cents to $25.05 and Goldman Sachs declined 21 cents to $88.60 as of 6:30 p.m. in New York trading. Citigroup (C) issued a statement disputing S&P’s downgrade.
“I don’t think moving from single A to single A- has much of an economic impact on anyone,” said David Hilder, a New York-based analyst at Susquehanna Financial Group. “Those ratings are at a high level compared to the whole spectrum of ratings and are still well into the territory of investment grade.”
For Bank of America, the bigger impact might have been with when Moody’s Investors Service reduced its grade in September to Baa1, two notches below the prior A2 rating, Hilder said. By contrast “these are relatively minor changes,” he said.
Collateral Triggers
Downgrades “could likely have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical,” Charlotte, North Carolina-based Bank of America said in its quarterly filing.
The company, which noted the risk of downgrades from S&P and Fitch Ratings in the filing, previously said it has prepared by lining up funding for a year.
Citibank NA, the deposit-taking arm of New York-based Citigroup, was downgraded to A from A+. The bank estimated in a quarterly filing that a one-level reduction to the unit’s rating could trigger $4 billion of collateral payments and other cash obligations.
Citigroup Dissents
“We completely disagree with S&P’s change to Citigroup Inc.’s holding company long-term and short-term ratings,” said Jon Diat, a spokesman for the lender, in an e-mailed statement. “Less than 1 percent of Citi’s funding will be affected by the S&P revision.”
Morgan Stanley estimated over-the-counter derivatives counterparties could demand $1.29 billion of collateral or termination payments from the New York-based firm after a one- notch downgrade. In addition, the firm may have to post an additional $323 million to exchanges and clearinghouses. All the estimates were as of Sept. 30.
JPMorgan, the largest and most profitable U.S. lender (BKX), has said the New York-based company may have to post an extra $1.5 billion in collateral against its derivatives and pay additional sums for contract terminations after a one-notch cut.
Mark Lake, a Morgan Stanley spokesman, David Wells, a spokesman for New York-based Goldman Sachs, and JPMorgan’s Joe Evangelisti declined to comment.
Power Shift
S&P analysts wrote earlier this month that the new ratings would reflect “a potential shift in the power balance of global banking.” In August, S&P downgraded the U.S. sovereign credit rating from AAA, citing political failure to reduce record deficits. The ratings company downgraded the six largest U.S. banks while upgrading two Chinese lenders.
S&P analysts wrote in a Nov. 1 research note describing its criteria that developed banking markets in the U.S. and Europe were under pressure, while emerging markets in Latin America and Asia were expanding.
“Leading banks in these regions have benefited from strong economic growth which has supported household and corporate credit quality,” S&P wrote.
S&P, the world’s largest provider of bond ratings, has roiled markets this month with a pair of errors related to sovereign credit ratings. On Nov. 10, the company sent, and then corrected, an erroneous message to subscribers suggesting France’s top credit rating had been downgraded. French 10-year bond yields rose as much as 28 basis points after the mistaken announcement. A week later, it released a statement with an incorrect rating for Brazil in the headline. It later sent a corrected headline.
The following table shows firms that were downgraded by S&P, followed by a list of banks that were upgraded.
Downgraded:
Banco Bilbao Vizcaya Argentaria S.A.
Bank of America Corp.
Bank of New York Mellon Corp.
Barclays Plc
Citigroup Inc.
Rabobank Nederland
Goldman Sachs Group Inc.
HSBC Holdings Plc
JPMorgan Chase & Co.
Lloyds Banking Group Plc
Morgan Stanley
Royal Bank of Scotland Plc
UBS AG
Wells Fargo & Co.
Upgraded:
Bank of China Ltd.
China Construction Bank Corp.
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net
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