Big Banks Brace for Credit Rating Downgrades

Moody’s Investors Service has begun notifying some big banks that their credit ratings may get cut as early as this afternoon.

The calls started going on in the last hour or so, according to people briefed on the matter but not authorized to speak on the record. With ratings changes, Moody’s typically reaches out to the banks a few hours before it publicly announces anything, giving them a chance to process the information.

Moody’s, one of that nation’s largest ratings agencies, announced in February that it would assess the credit of 17 global financial companies for potential downgrades, including Goldman Sachs and Bank of America. Morgan Stanley, which was hit hard in the financial crisis, could be the most vulnerable. The agency has warned it could cut the bank’s ratings by three notches, leaving it two levels above junk and below some of its rivals.

Moody’s did not respond to requests for comment. While Moody’s has started notifying the banks for prepare for rating changes this afternoon, the timeline for the agency’s actions is unclear.

A downgrade can have serious implication for a bank’s bottom line, potentially increasing the cost of borrowing and eroding the confidence of customers and lenders. Trading partners may opt to move their business elsewhere.

Shares in the nation’s biggest banks began falling more sharply in early afternoon trading on Thursday, as investors anticipated the potential downgrades.

Five institutions — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley — were all down by more than 1 percent. Morgan Stanley was down 1.5 percent. Hardest hit were Bank of America and Citigroup, which had fallen 2.6 percent. JPMorgan was down 1.5 percent, while Goldman was down 2.3 percent.

While Europe remains a pressure point with audits showing that Spanish lenders may need another $78 billion, it was the prospect of action by Moody’s that appeared to be weighing on the bank stocks.

Investors began tweeting about a report by Sky News’s Mark Kleinman this morning, saying that Moody’s was expected to make its long-awaited announcement about bank ratings after the market closed on Thursday.

source: nytimes.com