Citigroup Leads Wall Street in Moody’s Downgrade Dismissal

Updated on

Citigroup Inc., the lender whose credit rating was cut by Moody’s Investors Service to the lowest since its 1998 creation, led Wall Street banks in dismissing downgrades and urged investors to seek alternative analyses.

Moody’s two-grade cut of Citigroup’s ratings was unwarranted, arbitrary and failed to recognize the lender’s financial strength, the New York-based bank said in a statement. Investors shouldn’t rely on “opaque” credit ratings, it said.

“Moody’s approach is backward-looking and fails to recognize Citi’s transformation over the past several years,” said the bank, created in 1998 through the merger of Citicorp and Travelers Group Inc. “Citi believes that investors and clients have become much more sophisticated in their credit analysis over the past few years, and that few rely on ratings alone -- particularly from a single agency -- to make their credit decisions.”

Citigroup, Morgan Stanley, Bank of America Corp. and Royal Bank of Scotland Group Plc are among banks reacting to the downgrades, which could boost the firms’ borrowing costs and force them to post more collateral to trading partners when dealing in derivatives. Moody’s said the four firms, which took taxpayer-funded bailouts, have a history of “high volatility” and problems with risk management.

‘Risk Profile’

The action by Moody’s “does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile,” Edinburgh-based RBS said in a statement. “The impacts of this downgrade are manageable.”

Moody’s lowered Citigroup and Charlotte, North Carolina-based Bank of America to Baa2, two levels above junk. The ratings firm also reduced the Citibank NA bank subsidiary by two grades. The cuts could result in “cash obligations and collateral requirements” of $1.1 billion as of the end of March, the lender said in a quarterly filing.

Citigroup and Bank of America both took $45 billion bailouts from U.S. taxpayers, which the banks have since repaid. Bank of America, led by Chief Executive Officer Brian T. Moynihan, has “significant liquidity and resources to serve clients and customers as we have transformed the company,” Jerry Dubrowski, a spokesman for the lender, said in an e-mailed statement.

The ratings firm reduced RBS by one grade to Baa1. The bank received the biggest bailout of any lender during the financial crisis and is 64 percent-owned by U.K. taxpayers.

‘Somewhat Stunning’

Moody’s cut Morgan Stanley by two grades instead of three after CEO James Gorman said the bigger reduction would have been “somewhat stunning.”

“While Moody’s revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years,” Morgan Stanley said in a statement. “With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders.”

Moody’s has dealt “disproportionately adverse treatment” to U.S. banks compared with their rivals in Europe, Citigroup said. This “especially surprised” the bank, which is led by CEO Vikram Pandit. The U.S. financial system is stronger than it was before the financial crisis, the lender said.

Enhanced Stability

“Actions by legislators, regulators and firms themselves have substantially enhanced the stability, and resilience, of the system,” Citigroup said. “Moody’s actions ignore this fact.”

Moody’s cut Credit Suisse Group AG by three levels. David Mathers, chief financial officer of the Zurich-based firm, said the bank has a “strong liquidity position” and a “low exposure” to the most indebted European countries.

The ratings firm, which had said it might reduce UBS AG’s credit grade by three levels, cut that Zurich-based lender by two instead. UBS, the biggest Swiss bank, was still “disappointed” by the decision, Karina Byrne, a spokeswoman for the firm, said in an e-mailed statement.

Under Pandit, Citigroup faces challenges in “instilling a risk culture” that reduces volatile results, in part because the bank is under pressure to return capital to shareholders, Moody’s said. Citigroup said that suggestion was “simply without merit.”

“Investors and clients should make their own decisions,” the bank said. “Citi is aware that analytical alternatives to the ratings agencies exist today from several providers that would further enhance the ability of investors and clients to arrive at their own conclusions without being captive to the judgments of rating agencies.”