S&P downgrades 11 top global bank credit ratings

From uk.reuters.com | Reporting by Natalie Harrison and Dena Aubin

LONDON (Reuters) – Standard & Poor’s downgraded the credit ratings of 11 top global banks Friday including Citigroup, Deutsche Bank and JP Morgan, citing increased industry risk and a deepening economic slowdown.

The agency cut its ratings on Citigroup (C.N), Morgan Stanley (MS.N) and Goldman Sachs Group (GS.N) each by two notches.

It cut Bank of America (BAC.N), JP Morgan Chase (JPM.N) and Wells Fargo (WFC.N) by one notch.

In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS. It kept the rating of HSBC Bank, part of HSBC Holdings Plc, at “AA: but downgraded its outlook to negative from stable.

“The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,” S&P said in a note.

In New York trading, spreads on U.S. banks initially widened but then resumed a recent tightening trend spurred by Tuesday’s aggressive interest rate cut by the Federal Reserve, a trader said.

Citigroup’s 5.5 percent notes due in 2013, for example, tightened by 44 basis points to 516 basis points over Treasuries, according to MarketAxess.

Traders in London said it was difficult to gauge the market reaction because trading was thin as markets slow toward year-end.

“Banks are in a deteriorating operating environment, so the ratings changes should not be a surprise,” said Nigel Myer, a credit analyst at Dresdner Kleinwort.
Major banks’ ratings have been cut by about two notches on average since the credit crisis began in the summer of 2007, S&P analyst Tanya Azarchs said on a conference call.

Still, ratings would likely be even lower but for the “extraordinary support that’s been provided by a variety of governments to their banking systems,” Azarchs said.

Goldman Sachs’ rating is about two notches higher than it would be without government support, while Morgan Stanley’s is about three notches higher, S&P analysts said.


Moreover, ratings of large, systemically important financial institutions are unlikely to be cut below “A-plus” because of the expectation of future government support, S&P said.

Reflecting the importance of government help, S&P said for the first time it is publishing both issuer credit ratings and the number of rating notches attributed to expected government support for large systemically important banks.

S&P also said it expects higher levels of stress on banks than those felt in a typical business cycle downturn.

The difficult operating environment also will increase the risk of payment deferrals for banks’ hybrid capital securities in the United States and Europe, S&P said.

Longer term, Standard & Poor’s said issues surrounding banks’ basic business models have yet to be sorted out. Banks will likely face regulatory pressures that may require them to deleverage further, reassess their risk profiles and restrict some business activities, S&P said.

Government intervention intended to stabilize the sector and restore public confidence may balance industry pressures to a large extent, however, S&P said.

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