Bloomberg News

Morgan Stanley, UBS, Goldman May Be Cut in Moody’s Review

February 21, 2012

(Updates with collateral requirements in the 16th paragraph.)

Feb. 16 (Bloomberg) -- UBS AG, Credit Suisse Group AG and Morgan Stanley’s credit ratings may be cut by as many as three levels by Moody’s Investors Service, which is reviewing 17 banks and securities firms with global capital markets operations.

Goldman Sachs Group Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Citigroup Inc. are among companies that may be downgraded by two levels, Moody’s said in a statement, adding that the “guidance is indicative only.” Moody’s today cut some European insurers’ ratings based on risks stemming from the region’s sovereign debt crisis.

The potential downgrades, which may raise borrowing costs and force banks to increase collateral, put the ratings company at odds with bond investors, who are sticking with bets that new capital rules and trading limits will make the financial firms safer in the long run. Funding costs have climbed for banks worldwide as Greece’s debt woes roil markets.

“In the next two years, these big banks will be less robust than they used to be, that’s for sure,” Jim Antos, a Hong Kong-based financial analyst at Mizuho Securities Co., said by telephone. “For any bank that has to raise capital today, it’s already very difficult. This makes it just that much more expensive and difficult.”

Barclays Plc, BNP Paribas SA, Credit Agricole SA, HSBC Holdings Plc, Macquarie Group Ltd. and Royal Bank of Canada may also be cut by two levels, Moody’s said. Bank of America Corp., Nomura Holdings Inc. Royal Bank of Scotland Group Plc and Societe Generale SA may be lowered by one grade, it said.

Evolving Challenges

“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said. “These difficulties, together with inherent vulnerabilities such as confidence- sensitivity, interconnectedness and opacity of risk, have diminished the longer-term profitability and growth prospects of these firms.”

The 43-member Bloomberg Europe Banks and Financial Services Index fell 0.2 percent as of 4:45 p.m. local time in London.

Credit Suisse’s 2.25 billion euros ($2.95 billion) of 3.875 percent bonds due in 2017 fell 0.4 percent to 103.58 cents on the euro today, according to Bloomberg Bond Trader prices. UBS’s 1.5 billion euros of 3.125 percent notes maturing in 2016 fell 0.6 percent to 100.58 cents on the euro, the prices show.

Bond Prices

UBS, Switzerland’s biggest bank, has a long-term rating of Aa3 at Moody’s, and a three-level downgrade would reduce it to A3, the fourth-lowest investment grade. Domestic rival Credit Suisse is currently rated one level higher than UBS at Aa2 at the group level, while its operating subsidiary Credit Suisse AG is rated Aa1. New York-based Morgan Stanley is A2, and a three- level cut would drag it to Baa2, the second-lowest investment grade.

“Today’s announcement by Moody’s does not immediately affect UBS’s ratings” because it has been on review since September, the Zurich-based bank wrote in an e-mailed statement to Bloomberg News. “UBS’s financial position is strong and a source of competitive advantage.”

Spokesmen for Morgan Stanley, New York-based JPMorgan and Charlotte, North Carolina-based Bank of America declined to comment on the review. Spokesmen in Singapore for London-based Barclays, Frankfurt-based Deutsche Bank, Zurich-based Credit Suisse and Edinburgh-based RBS also declined to comment, as did Macquarie in Sydney and Nomura in Tokyo. Spokesmen for Paris- based BNP Paribas and London-based HSBC weren’t available to comment.

‘Unwarranted’ Inclusion

“Our inclusion is unwarranted,” Toronto-based Royal Bank of Canada said in a statement. “This action does nothing to help investors differentiate between strong banks and weak ones. RBC’s credit rating and capital base are among the strongest of all banks globally.”

As well as UBS, Credit Suisse, Macquarie and Nomura were already on review before today and those examinations are being extended, Moody’s said. A one-level downgrade for Nomura would push its long-term rating to Baa3, one grade above junk.

Citigroup has “a strong capital base, robust structural liquidity and ample reserves,” said Jon Diat, a spokesman for the New York-based bank facing a cut to as low as Baa2.

The review by Moody’s “is likely to have very limited consequences on financial markets, which have adjusted over the past few months to a new environment in which banks’ ratings overall are lower,” said Kate Henley, a spokeswoman for Societe Generale in Hong Kong. A one-level cut would bring the Paris- based bank to A2, still the sixth-highest investment grade.

Additional Collateral

The maximum downgrades, if they were followed by similar actions from other ratings companies, would force the five U.S. banks to post at least $19 billion in additional collateral and termination payments, as of Sept. 30. That relates to derivative liabilities which feature credit-rating triggers.

The banks estimated the amounts in their third-quarter regulatory filing and will update the figures in their annual reports released in the next few weeks.

The threat of downgrades hasn’t deterred investors from buying financial debt. The response is similar to that taken in August when financial markets dismissed the U.S.’s loss of AAA status at Standard & Poor’s by pushing the yield on the 10-year Treasury note to a record-low 1.6714 percent seven weeks later.

Bank bonds from the U.S. to Europe and Asia have returned 5.8 percent from the end of November through Feb. 13, poised for the biggest three-month gain since the period ended September 2009, according to Bank of America Merrill Lynch index data.

Downgrade Expected

“The downgrade is unlikely to shake the market a lot as this has been expected for quite some time,” said Lewis Wan, Hong Kong-based chief investment officer of Pride Investments Group Ltd., which manages $250 million of assets. “The banking industry -- including investment banks, retail banks and commercial banks -- will run their business more conservatively because of the increasingly tougher regulations.”

Moody’s wrote on Jan. 19 that credit profiles of many global lenders are weakening amid worsening government finances, economic uncertainty and higher funding costs.

Richard Noonan, a spokesman for S&P in Melbourne, said the company unveiled fresh criteria for assessing banks worldwide in November and implemented a number of rating actions. “We’re always looking at bank ratings, and they’re under constant review by our analysts,” Noonan said in a telephone interview.

Fitch Ratings

Matt Robinson, a spokesman for Fitch Ratings in Sydney, declined to comment on Moody’s action. Fitch released a Feb. 13 report on its decision to review in the fourth quarter of 2011 large banks around the world, which “resulted in a significant increase in the number of rating downgrades,” he said.

Moody’s took action on European insurers today on risks tied to the region’s sovereign debt and banks. Allianz SpA, the Italian unit of Allianz SE, Europe’s largest insurer, had its insurance financial strength rating cut to A1 from Aa3 with a negative outlook, Moody’s said separately today.

The company affirmed the insurance financial strength rating for Allianz, AXA SA, Aviva Plc and their subsidiaries, while changing their outlook to negative because of weaker economies in the euro area.

--With assistance from Donal Griffin in New York, Jacob Greber in Sydney, Shingo Kawamoto in Tokyo, Bei Hu and Rachel Evans in Hong Kong, Vivek Shankar in San Francisco, Nicholas Comfort in Frankfurt and Ben Martin in London. Editors: Russell Ward, Jon Menon

To contact the reporters on this story: Sanat Vallikappen in Singapore at vallikappen@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net


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