Moody’s to Review Ratings of Major US Banks

Moody's Investors Service – the credit rating arm of Moody's Corp. (MCO) – has put the senior and subordinated debt ratings of four major U.S. banks – The Goldman Sachs Group, Inc. (GS), Wells Fargo & Company (WFC), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) – under review for a downgrade.

Change in federal policies to support troubled banks is the rationale behind Moody’s review. Regulators are planning to build liquidation plans for U.S. banks to combat another financial crisis. Therefore, Moody's believes the level of government support might be lower as compared with the bailout of banks owing to financial crisis in 2008.

Bank of America Corporation (BAC) and Citigroup, Inc. (C) are also under review but without any direction. According to Moody’s, these two banks with improving financial performance might overshadow the reduction in government support. For JPMorgan and Wells Fargo, the debt is rated A2, while Goldman remains one notch below at A3. Further, Morgan Stanley is at Baa1 and Citigroup along with BofA is rated Baa2.

Moody’s plans to reconsider its assumptions over government support to the banking system by the end of 2013. In the last year, progress was visible in the government’s plan to structure policies for plausibly resolving these large systemically important banks.

Moreover, such plans might compel debtholders to record losses or convert stakes to equity. Further, the federal policies might affect the ratings of the companies’ deposit-taking subsidiaries. Therefore, Moody’s reviews for ratings of the banks will be based on the level of government support.

Notably, this review also includes trust and custody banks – The Bank of New York Mellon Corporation (BK) and State Street Corporation (STT), which are already under scrutiny. While reviewing the ratings of these custody banks, Moody’s will focus on the long-term profitability challenges bracing them. These banks aggressively price their core custody products and services, thereby creating a barrier-to-entry market for its competitors.

If Moody’s downgrades the ratings of major global banks, it will lower investors’ confidence in the stocks. Moreover, it might increase funding costs, thereby leading to higher expenses in the future.

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