Moody's downgrades credit of 15 major banks

 

Bank of America

Bank stocks were hit hard in anticipation of the move.

By Jim J. Jubak 20 minutes ago

Thursday's downgrade of 15 big global banks is just the latest stop on Moody's Investor Service's world tour of the financial sector. 

Back in February, Moody's announced that it would review the credit ratings of 17 global investment banks. On May 14, it downgraded the credit ratings of Italian banks that included UniCredit and Intesa Sanpaolo (ISNPY -2.52%). On May 18 it downgraded 16 Spanish banks including Banco Santander (SAN -2.72%). June 6 brought downgrades to seven German and three Austrian banks.

Thursday, Moody’s downgraded Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland Group, Societe Generale, and UBS. (Moody's had already downgraded Macquarie Group and Nomura Holdings on March 15.)

Bank stocks were hammered in anticipation of the downgrades. For example, shares of Bank of America (BAC -3.93%) fell 3.93%, shares of HSBC (HBC -2.46%) declined by 2.46%, and shares of JPMorgan Chase (JPM -2.58%) dropped 2.58%. The drop in bank shares helped power Thursday’s 2.23% fall in the Standard & Poor’s 500 stock index.

Why does the downgrade matter? Because it costs banks money.

For example, before the Moody's announcement Morgan Stanley (MS -1.69%) estimated that a three-notch downgrade to Baa2 would force the bank to put up more collateral for about 8% of its derivatives contracts. That would have could cost the company somewhere between $868 million and $7.2 billion in additional collateral and termination payments, according to filings with the Securities & Exchange Commission. As for the other banks, a one-notch downgrade for Bank of America could mean the bank has to put up an additional $2.7 billion in collateral. A two-notch downgrade for Citigroup (C -3.57%) could cost the bank an additional $4.7 billion in collateral. A two- notch downgrade to Goldman Sachs (GS -2.74%) could cost $2.2 billion in additional collateral.

Of the 15 banks in the list Thursday, Moody's gave a three-notch downgrade to just one, Credit Suisse. Morgan Stanley, which had been expected to get a three-notch downgrade, was downgraded by just two notches. (The stock rallied in afterhours trading by 3.6%)

Ten banks got two notch downgrades, including JP Morgan Chase, Goldman Sachs, and Citigroup.

The opportunity from all this may lie in the shares of the bigger regional banks such as U.S. Bancorp (USB -1.54%), PNC Financial Services (PNC -2.04%) and BB&T (BBT -1.02%). Those stocks were hit Thursday in sympathy with the big global investment banks -- PNC Financial fell 2.04%, for example -- but the big regionals don’t have the complex trading and derivative operations that are hurting the global investment banks and they look like their taking market share in such bread-and-butter bank business as commercial lending. (U.S. Bancorp is a member of my Jubak’s Picks portfolio.)