Moody’s Review of Bailouts May Dent Banks, JPMorgan Says
A reduction in Moody’s Investors Service’s estimate of how much taxpayer support financial firms will receive in a crisis may result in credit ratings cuts for banks from Wells Fargo & Co. (WFC) to Goldman Sachs Group Inc. (GS), according to JPMorgan Chase & Co.
Moody’s, which placed “negative outlooks” on the holding company ratings of eight systemically important U.S. lenders in June, said last week that it expects to update its “bank holding company support assumptions” by year-end. The firms’ grades are as many as two levels higher because of the potential of a public backstop, according to Moody’s.
“Our base case assumption is that there will be a one notch reduction across the board,” JPMorgan analysts led by Kabir Caprihan said today in a report. “We also see the potential for future upgrades in the standalone credit ratings for Bank of America and Citigroup,” the analysts said.
The banks included in the Moody’s review are Bank of New York Mellon Corp., State Street Corp., Wells Fargo, JPMorgan, Goldman Sachs, Morgan Stanley, Citigroup Inc. and Bank of America Corp.
The Federal Deposit Insurance Corp. has made progress toward reducing the likelihood of future government support as the agency identifies obstacles to implement its so-called orderly liquidation authority, which gives the FDIC power to wind down, split up or sell off companies considered a potential systemic risk to U.S. financial stability, Moody’s said in a March 27 report.
“Our base case assumes that Moody’s will remove some of the support from all or some of the holding companies under review, but will not completely remove the ratings uplift from support across the board,” the JPMorgan analysts said.
Investors in the $5.2 trillion U.S. corporate bond market are wagering banks are safer relative to industrial companies even after Moody’s cut the ratings of 15 of the world’s largest banks in June, citing fragile confidence and tighter regulations that pinched revenue.
Lenders are poised to overtake industrial companies as the safest borrowers for the first time since the start of the worst financial crisis since the Great Depression, with investors demanding an extra 156 basis points in yield over benchmarks to buy bonds of banks, compared with 146 basis points for companies from Alcoa Inc. to Ford Motor Co., Bank of America Merrill Lynch index data show.
At 10 basis points, the gap has shrunk from a peak of 365 in March 2009 and may invert as soon as this year based on the current pace of tightening.
Bank bonds were seen as safer than industrial debt by investors until September 2007, the month after BNP Paribas SA marked the start of the credit seizure by halting withdrawals from investment funds that owned subprime mortgage securities.
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