Since 2007, Moody's and other rating agencies ratings are worth not much more than toilet paper, and worthy only for that purpose.
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Credit Suisse Group AG (CSGN)'s credit rating was cut three levels and Morgan Stanley (MS)'s was reduced by two as Moody's Investors Service downgraded 15 banks in moves that may shake up competition among Wall Street's biggest firms.
Credit Suisse was cut to A2, the same as JPMorgan Chase & Co. (JPM) and BNP Paribas SA (BNP), as Moody's completed a review of global banks with capital-markets operations it announced in February. Morgan Stanley and Zurich-based UBS AG (UBSN), the other firms singled out for three-level reductions, were lowered two steps instead, the ratings firm said yesterday in a statement.
"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 the statement.
Lower ratings can lead to higher costs for borrowing and collateral. The downgrades leave Citigroup Inc. (C) and Charlotte, North Carolina-based Bank of America Corp. (BAC) as the lowest-rated banks among the 15 at Baa2, two levels above junk. Moody's kept the long-term ratings of both lenders on negative outlook, which means they may be cut again.
Asian stocks fell, trimming a third weekly advance, after the Moody's downgrades and reports signaling a slowing U.S. economic recovery. The MSCI Asia Pacific Index (MXAP) slid 1.1 percent as of 11:28 a.m. in Tokyo. Oil traded near a nine-month low.
JPMorgan's Trading
JPMorgan, which reported a $2 billion trading loss last month, was included by Moody's in the group of banks with the highest stand-alone credit ratings, along with HSBC Holdings Plc (HSBA) and Toronto-based Royal Bank of Canada. (RY) Moody's said those firms had stronger "shock absorbers" from earnings in more stable businesses than investment banking and trading.
The trading loss at New York-based JPMorgan was an "important factor in the downgrade of the stand-alone credit profile," Moody's said. "It illustrates the challenges of monitoring and managing risk in a complex global organization and highlights the opacity of such risks."
Royal Bank of Scotland Group Plc, based in Edinburgh, and Paris-based Societe Generale SA (GLE), were both cut one grade and Frankfurt-based Deutsche Bank AG (DBK) and French lenders BNP Paribas and Credit Agricole SA were all lowered two levels.
Goldman Sachs Group Inc. (GS), Morgan Stanley and London-based Barclays Plc (BARC) all had their holding company short-term ratings cut to P-2 from P-1.
Credit Suisse's main operating subsidiary, Credit Suisse AG, also was cut three levels to A1 from Aa1 and the outlook is stable, Moody's said.
Financial Status
"Moody's continues to recognize Credit Suisse as one of the most highly rated banks in its peer group, citing our balanced business portfolio, strong liquidity position, improving capital position as well as our low exposure to the peripheral European economies," David Mathers, Credit Suisse's chief financial officer, said in a statement.
The Swiss bank, at A2, is on par with six other lenders in the review and trails the ratings of HSBC and RBC. Four U.S. firms and British banks Barclays and RBS have lower ratings.
"Funding for Credit Suisse shouldn't be a problem," said George Strickland, who helps oversee $14 billion of fixed-income assets as a managing director at Santa Fe, New Mexico-based Thornburg Management Inc. "Their short-term rating is still money-market eligible and their long-term rating is mid-tier A and as good as almost any bank."
Global Review
The downgrades may force banks to post additional collateral to trading partners in derivatives deals while boosting the companies' borrowing costs. Moody's said when it announced the review that it was seeking to reflect the banks' reliance on fragile confidence in funding markets and increased pressures from regulation and a difficult market environment.
The ratings firm said Feb. 15 it was reviewing grades for 17 banks. Moody's cut Sydney-based Macquarie Group Ltd. (MQG) and Nomura Holdings Inc. (8604) one level each in March. It also started a review of lenders in more than a dozen European nations and already has reduced grades in Spain, Germany, Italy, Sweden, Austria and Denmark. Nomura, based in Tokyo, is the lowest-rated of the 17 at Baa3, one level above junk.
The downgrades may affect the competitive landscape in derivatives that aren't centrally cleared, a business that provides about 15 percent of the industry's trading revenue, Kinner Lakhani, a Citigroup analyst, wrote in an April 30 note. Banks with the largest cuts may lose revenue from such long-term derivatives, Charles Peabody, a Portales Partners LLC analyst, said in a June 4 interview on the "Bloomberg Surveillance" radio program.
'Strategic Actions'
"Right now there are a lot of internal bank policies that if you're doing a longer-term structured derivative, you want the counterparty to be A-rated or above," said David Konrad, an analyst at KBW Inc. in New York. Because Moody's is downgrading the entire banking industry rather than one or two firms, "a lot of those policies may be rewritten over time."
Morgan Stanley was cut two levels instead of three because of assumed support from Mitsubishi UFJ Financial Group Inc., the investment bank's largest shareholder, Moody's said.
Even with the smaller-than-expected downgrade, "we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years," New York-based Morgan Stanley said in a statement. "With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."
'New World'
Credit Suisse said in its annual report that a three-level cut would result in additional collateral requirements or termination payments under certain derivative instruments of 4.5 billion Swiss francs ($4.7 billion), as of Dec. 31. UBS said it would face 2.1 billion francs of collateral calls from a two- level cut.
Banks' large liquidity buffers will make collateral requirements "manageable," Amit Goel, a Credit Suisse analyst, wrote in a May report.
"Pre-crisis bank ratings used to be clustered together," Lakhani wrote. "In the new world, dispersion has increased. Markets tend to discriminate more between issuers at lower ratings -- in terms of funding costs. Over time, this could provide a competitive edge for higher-rated firms," including JPMorgan and London-based HSBC.
Morgan Stanley's stock fell on June 4 to what was then its lowest close since December 2008 as investors weighed a potential credit-rating cut. The shares have rallied 13 percent since then.
Government Impact
Moody's wrote on Jan. 19 that credit profiles of global lenders are weakening as governments struggle with their finances, and economic uncertainty and higher funding costs persist. When Moody's places a company's ratings on review for a downgrade, it typically decides whether to cut them within three months.
Moody's cut the long-term credit rating of Citigroup, the third-biggest U.S. bank, and its bank subsidiary Citibank NA by two levels. That could result in "cash obligations and collateral requirements" of $1.1 billion as of the end of March, the lender said in a filing.
The ratings firm also cut Citibank NA's short-term credit rating. New York-based Citigroup had warned that a cut may cause some corporate customers to evaluate the deposits they keep at the bank and that there might be an "additional potential impact" on $25.3 billion of liquidity guarantees on asset- backed commercial paper, a type of short-term debt.
'Backward-Looking'
"Citi strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted," the bank said in a statement. "Moody's approach is backward-looking and fails to recognize Citi's transformation over the past several years, the strength and diversity of Citi's franchise, and the substantial improvements in Citi's risk management, capital levels and liquidity."
Other companies have spoken out against the Moody's review, citing the firm's methodology and approach. UBS CFO Tom Naratil said his firm's financial position is "completely inconsistent" with one that would have its short-term rating cut from P-1.
Morgan Stanley CEO James Gorman said June 12 it would be "somewhat stunning" if his firm was cut three levels given the bank's increased capital and liquidity. Goldman Sachs CFO David Viniar has said that he and other executives "strongly disagree" with Moody's approach.
Unwarranted Action
"If you look at every single credit metric there is for Goldman Sachs and frankly for many of our competitors, none of the actions they've talked about are warranted," Viniar told analysts and investors April 17 after the New York-based company reported first-quarter results. "We are, as you know, we're quite analytical. And when we do all of the analysis, we cannot figure out why they are where they are."
David Knutson, a Chicago-based credit analyst with Legal & General Investment Management, said Moody's is in a difficult business because it collects fees from the banks.
"When you upgrade someone, I imagine they're happy to sign the check because they earn it back in lower rates," Knutson said. "When you downgrade them, signing that check is a much harder thing to do."
To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net.
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