Standard & Poor's Friday downgraded 11 major U.S. and European financial institutions as they continue to face pressure from complex financial risks and the weakening economy.
The downgrades included some of the municipal market's largest letter of credit providers, including Bank of America NA and JPMorgan Chase Bank NA, both downgraded to AA-minus from AA. Both maintained short-term ratings of A-1-plus, Standard & Poor's highest rating.
"The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions' future performance due to increasing bank industry risk and the deepening global economic slowdown," Standard & Poor's said. "We believe significant government intervention intended to stabilize the sector and restore public confidence may balance these pressures to a large extent."
Initially, the downgrades to the letter of credit providers are unlikely to have a big impact on the municipal market as the changes to Bank of America and JPMorgan put them only single notches lower and maintained their high short-term ratings, said Alpine Funds Senior Portfolio Manager Steven Shachat. There "probably won't be huge repercussions," but it may at least put the issue on people's radar, he said.
Bank of America has this year provided letters of credit for 233 issues with combined par value of about $16 billion, far more than any bank, according to Thomson Reuters. JPMorgan Chase, which ranks second, has provided letters of credit for 137 issues with a combined par value of $6.8 billion. Letter of credit use skyrocketed this year as bond insurers were downgraded and issuers needing liquidity support sought alternate forms of credit enhancement when restructuring auction-rate debt.
The group of 11 downgraded institutions also included Barclays Bank, lowered to AA-minus from AA; Citibank NA, lowered to AA-minus from AA; Credit Suisse, lowered to A-plus from AA-minus; Deutsche Bank AG, lowered to A-plus from AA-minus; Goldman Sachs Group Inc., lowered to A from AA-minus; Morgan Stanley, lowered to A from A-plus; Royal Bank of Scotland Plc, lowered to A-plus from AA-minus; UBS AG, lowered to A-plus from AA-minus; and Wells Fargo Bank NA, lowered to AA-plus from triple-A.
Standard & Poor's moved to negative from stable the AA of HSBC Bank PLC but did not lower its rating.
Standard & Poor's action came a day after Moody's Investors Service downgraded Citigroup Inc. to A2 from Aa3 and Citibank NA to Aa3 from Aa1.
Standard & Poor's lowered the bank industry country risk assessment for both the United States and the United Kingdom to Group 2 from Group 1, reflecting the difficult environmentincluding credit deterioration and the weakening economyweighing on the banks.
Standard & Poor's said the issues related to the business model "have not been sorted out" for many of the banks that face confidence-sensitive markets and possible regulatory pressures that will require them to adjust their risk profiles.
The financial crisis' impact on banks has been slightly offset by the support they have received from government institutions, Standard & Poor's said. The rating agency factored in both ongoing system support, such as prudent regulation and central bank liquidity, and extraordinary support, such as some of the recent measures taken by the U.S. government.
With certain financial institutions that may be viewed as "systemically important," Standard & Poor's is publishing issuer credit ratings and the number of notches "attributed to the likely availability of future extraordinary support." The issuer credit ratings on the 12 banks exceeded their stand-alone ratings by up to three notches. The rating on Morgan Stanley's operating companies, downgraded to A-plus from AA-minus, was up three notches from their stand-alone ratings, for instance.
Institutions with stand-alone credit ratings of A-plus or better received no credit bump for possible government support. For banks in the group of 12 with stand-alone ratings of A or lower, Standard & Poor's said government support could in future give them more than three notches of support to maintain issuer credit ratings at the A-plus level.
Since mid-2007, Standard & Poor's has lowered the ratings on 12 institutions by about two notches each, including Friday's actions, it said.
"On one hand, the series of events may have merited more than the two notches, but the actual ratings were only down two notches because of the government support," Standard & Poor's Managing Director Tanya Azarchs said in a conference call.
Analysts at CreditSights noted the downgrades by both Moody's and Standard & Poor's may have "zapped away at least some of the holiday spirit" in what has already been a very difficult year.
"With the holidays fast approaching and already frazzled bank analysts rushing to finish their shopping, the rating agencies took the role of the Grinch of Dr. Seuss fame with their multi-notch downgrades of the big bank sector," analysts David Hendler and Baylor A. Lancaster wrote. "We note that the timing of the rating actions were just as many people are starting to focus more on baking cookies rather than reading agency analysts reports, so we sense that the agencies wanted to act before things got too quiet at trading desk around the globe [this week]."