Yes, Moody’s has downgraded banks.
Yes, some banks are now solidly Baa rated and may fall further. Yes, we have been here before – back in the 1980s, when, as CreditSights analyst David Hendler notes, many banks were rated BBB.
But back in the 1980s, there was a lot less in the way of derivatives trading.
The downgrades are expected to hit OTC derivatives trading businesses most of all: where there aren’t central clearers, banks with lower ratings will be compelled to post a lot more collateral. Hence, Morgan Stanley says it will face a $6.8bn collateral call after its two notch downgrade (and would have faced a $9.6bn call if the feared three notch downgrade had gone ahead), Goldman Sachs said earlier that its costs would rise $2.2bn following the two notch reduction which transpired; and Bank of America said earlier that its one notch downgrade would cost it $2.7bn.
Worst, though, is the fact that some banks seem to be sinking irredeemably towards junk status. If this happens, some counterparties will refuse to engage with their trading operations. Blackrock’s Larry Fink already said he may be obliged to withdraw his business from “some banks” if they’re downgraded because clients’ portfolio agreements specify that Blackrock will only trade with banks whose debt is solidly investment grade.
We’ve listed the new ratings bank by bank below – plus Moody’s outlook for the future. Clearly, it’s not great for some of the banks concerned. Morgan Stanley had hoped to sidestep the effects of a downgrade simply by shifting a lot of its $52 trillion derivatives portfolio to a higher rated subsidiary, but it seems there are ‘regulatory obstacles.’
The downgrades could be seen as a very bad thing for Bank of America and Citigroup, which are now closest to being junked (with the exception of Nomura) and have already been losing market share in fixed income according to Bloomberg. On the other hand, the downgrades of most other banks could be seen as a good thing, leaving BofA and Citi on a slightly more level playing field. Notably, after all the fuss about Credit Suisse and its need to raise more capital, Credit Suisse doesn't rank too badly in terms of its long debt ratings. Credit Suisse's London business actually ranks better than the firm as a whole - at A1, putting it above the likes of Goldman Sachs and Deutsche in Europe.
Firstly, a reminder of how Moody’s ratings work. The main categories are listed below. Within each category, there are three ‘numerical modifiers’ (1,2 & 3), of which 1 is the highest and 3 is the lowest. Baa1 is therefore rated higher than Baa3. And Baa3 is only 1 grade away from Ba1, at which point debt is seen as distinctly ‘speculative’ and things will become a lot more difficult for the banks concerned.
1.RBC: Aa3 (was Aa1, outlook stable)
=1.HSBC: Aa3 (was Aa2, outlook negative)
2. SocGen: A2 (was A1, outlook stable)
=2. UBS: A2 (was Aa3, outlook stable)
=2. Deutsche: A2 (was Aa3, outlook stable)
=2. BNP Paribas: A2 (was Aa3, outlook stable)
=2. JPMorgan: A2 (was Aa3, outlook negative)
=2. Credit Agricole: A2 (was Aa3, outlook negative)
=2. Credit Suisse Group: A2 (was Aa2, outlook not given)
3. Barclays: A3 (was A1, outlook negative)
=3. Goldman Sachs: A3 (was A1, outlook negative)
4. Morgan Stanley: Baa1 (was A2, outlook negative)
=4. RBS: Baa1 (was A3, outlook negative)
5. Bank of America: Baa2 (was Baa1, outlook negative)
=5. Citigroup: Baa2 (was A3, outlook negative)
6. Nomura. Baa3 (not downgraded yesterday, but in March)