Standard & Poor’s on Tuesday downgraded some of the world’s largest financial institutions, another blow to an industry that continues to struggle three years after the darkest hours of the financial crisis.þþThe agency lowered by one notch its long-term credit ratings on some of the biggest and best-known banks in the United States, including Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase. The action, the result of S.&P. applying new standards to 37 financial firms around the world, prompted a downgrade of 15 banks. Among the eight largest banks in the United States under review by S.&P., only Boston-based State Street was spared.þþþþ“We’ve been doing a lot of deep thinking, and this goes back to taking account of lessons learned during the financial crisis,” said Craig Parmelee, head of the agency’s North American financial institutions practice.þþRating agencies, which were criticized for being too slow to sound the alarms about the 2008 financial crisis, have recently been carrying out an aggressive wave of downgrades. In September, Moody’s cut its credit ratings on three large banks: Bank of America, Citigroup and Wells Fargo. Moody’s said the downgrades were warranted because it believed the federal government was less likely to extend a helping hand to ailing banks as it did in the wake of the collapse of the investment bank Lehman Brothers in the fall of 2008.þþOn Tuesday, S.&P. left 20 other banks unchanged and actually increased the ratings on two Chinese firms, the China Construction Bank and the Bank of China.þþBut for most financial institutions in the United States and Europe, it has been tough sledding this year.þþIn the United States, banks have been battling falling profits as economic woes and new regulations have eaten into profits. Overseas, concerns that European countries like Greece and Italy could default on their own debt payments have sent shockwaves through global markets, deepening the problems of American banks.þþAs the profit engines have slowed, cost-cutting has become a central focus. Over the summer, Goldman said that it would wring out $1.2 billion in costs from its operations by mid-2012, a move that eliminated more than 1,000 jobs. Bank of America, perhaps the most beleaguered of all banks, announced it could eventually lay off 30,000 employees as part of a wide-ranging plan to save $5 billion in annual costs by the end of 2013.þþEven before the downgrade by S.&P., which came after the stock market’s close on Tuesday, Bank of America’s shares were hitting new lows for the year. At one point the stock touched $5.03, before closing at $5.08, a loss of 3.2 percent for the day.þþThis was the lowest point for Bank of America since the dark days of March 2009, when bank stocks and the broader market hit bottom in the wake of the financial crisis.þþSome investors are uneasy that breaking the $5 level will mean a new chapter in Bank of America’s troubles, causing some institutional managers to sell and taking the bank into the low single-digit realm usually reserved for faltering companies.þþ“Bank of America is a microcosm of the crisis of confidence in the industry — in the numbers, the managers and the regulators,” said Mike Mayo, a banking analyst with Crédit Agricole.þþBank of America is not alone in watching its stock price fall. Shares of Goldman Sachs have dropped more than 47 percent so far this year. Its stock closed Tuesday at $88.81.þþS.&P.’s decision to issue broad downgrades is hardly surprising. The action come weeks after the rating agency overhauled its method for grading financial institutions. Now, the agency plans to keep a closer watch on whether banks have put away enough capital for rainy days. It also will pay particular attention to the overall health of the economy in the institution’s home country, and whether that country’s government will step in to bail out firms in times of extreme stress.þþMr. Parmelee of S.&P. likened the change to “emphasizing the neighborhood before we begin to analyze the house.”þþAt the time of S.&P.’s announcement of its new rating method earlier this month, the agency signaled that it would lower the long-term ratings of as many as 15 percent of the banks it reviewed and would change the ratings on 40 percent. Investors, analysts said, should also pay particular attention to any short-term rating changes because that affects a bank’s cost of daily borrowing.þþ“We believe that the industry is at a crossroads and that there are several inflection points, and it’s too early to tell how each will play out,” Jayan Dhru, S.&P.’s head of global financial ratings, said in a video explaining the new criteria. “With more stringent capital and liquidity requirements and restrictions on higher-risk activities, the profitability of banking is likely to be much lower than it was before the crisis. This may be acceptable from a creditworthiness perspective, but the impact of business models and global growth may be significant.”þþInvestors continue to keep a close eye on Bank of America.þþWhile the firm is in a stronger financial position than it was in 2009, investors remain deeply concerned about its potential losses from harmful subprime mortgages packaged by Countrywide Financial, the mortgage specialist Bank of America acquired in 2008.þþIn addition, as the second-largest bank in the United States after JPMorgan Chase, it remains vulnerable to any downshift in the United States economy, which has been posting anemic growth. Mr. Mayo said the ratings cut was not “life-threatening,” but was another indication that the Bank of America would face higher financing costs in the future. That would eat into its thin profit margins.þþThen there is Europe. Bank of America has several billion dollars in direct exposure to Europe, but investors also worry that a deepening of the crisis over sovereign debt will hurt the broader banking group and ripple through financial markets.þþChris Kotowski, an analyst with Oppenheimer, questioned the timing of the downgrade, noting that Bank of America’s loan losses and nonperforming assets were at levels well below where they were two years ago, while its capital had nearly doubled.þþ“They should have downgraded Bank of America back then,” he said. “This is confirmation that rating agencies are lagging indicators.”þ
Source: NY Times
