Morgan Stanley (MS:US), owner of the world’s biggest brokerage, sees a potential three-level credit- rating downgrade from Moody’s Investors Service as manageable, Chief Financial Officer Ruth Porat said.
“We’ve done a lot to narrow the impact of any potential ratings change,” Porat said in an interview today. “Our view is that the potential outcomes are manageable, and I think our clients understand that.”
Morgan Stanley faces what would be the largest credit- rating cut among U.S. banks, which may force the firm to post more collateral on derivatives trades and pay more to borrow. Moody’s said it will take ratings actions on the largest global investment banks by the end of June. A three-level cut would reduce Morgan Stanley’s grade from A2 to Baa2.
Moody’s will need to incorporate data from last month’s Federal Reserve stress test, which Morgan Stanley passed, and first-quarter results, Chief Executive Officer James Gorman said on a conference call with analysts.
“They now have the benefit of two concrete pieces of information that they didn’t have,” said Gorman, 53. “It’s important and constructive that they’re delaying their readout on this until early June as they try and assimilate all of that plus the feedback that they’ve had from the industry.”
Morgan Stanley has cut back its structured derivatives business, which would be most affected by a downgrade, Porat said. The firm also has moved more derivatives to central clearinghouses, a probable requirement of regulations stemming from the Dodd-Frank Act, and has a higher-rated subsidiary it could use for some trades, said Porat, 54.
“We’ve reduced the universe of relevant parts of the business (MS:US) or positions that would be affected by any kind of a change,” she said.
The firm’s clients also don’t rely solely on Moody’s, Porat said. Morgan Stanley is rated A- by Standard & Poor’s and A by Fitch Ratings.
“A lot of clients are doing their own credit work,” she said.
BlackRock Inc. (BLK:US), the world’s biggest asset manager, said earlier this week that it may be forced to reduce business with some banks if their credit ratings are lowered.
“I don’t think there’s any possibility we’re not going to be doing business with BlackRock,” Gorman said today in an interview on Bloomberg Television. “It’s only certain individual contracts and we’ve created a number of workaround situations where we can deal with this.”
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