S&P Downgrades U.S. Banks: Playing Catch-Up To The Market

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Includes: BAC, BK, C, HSBC, JPM, WFC
by: Weiss Ratings

Standard & Poor’s Ratings Services finally did it. They stepped up to provide investors with a more realistic view of the financial strength of the big U.S. banks. What pushed them to this point -- bad publicity, angry investors, or skittish money managers? Or, maybe it was the fact that the market had already priced in an anticipated downgrade. We’ll never know for sure.

What we do know is S&P’s downgrade didn’t lead the market; it followed. Now it seems S&P is playing catch up to address U.S. bank exposure to troubled European debt. Is that what investors expect from a rating agency? While we agree that S&P must be extremely diligent before sounding the clarion call, their judgment is late in coming. The information to analyze and support the downgrades has been front and center for some time.

In fact, Weiss Ratings, the nation’s leading independent provider of data and analysis for the bank and insurance industries, has steadily downgraded these institutions, most recently in September based on the current, June 2011, regulatory data. Just look …

Institution Name

Weiss Rating

Weiss Rating Definition

S&P Rating

Bank of America

D

Weak

A-

Bank of New York Mellon

C

Fair

AA-

BNY Mellon NA

B-

Good

AA-

Citibank NA

C

Fair

A-

HSBC Bank USA NA

C

Fair

AA-

JPMorgan Chase Bank NA

D

Weak

A+

Wells Fargo Bank NA

D

Weak

AA-

Click to enlarge

What’s wrong with this picture? You may think Weiss Ratings is far afield, after all, S&P is still rating these institutions in the “A” range. And that’s after their downgrade. But, if one of these is your personal bank, a bank you’re doing business with or investing in, you might want to think again.

Yes, it is clear that Weiss provides a more conservative view. If you are trying to make some sense of these crazy markets and the financial strength of your bank is certainly part of the picture, wouldn’t you want a realistic view? Wouldn’t you want an EARLY warning? Wouldn’t you question why S&P, a nationally recognized statistical rating organization, didn’t act sooner? Of course you would.

Weiss does not believe these banks are on the brink of failure, but they clearly have issues that investors and bank customers must be aware of. If you’ve been following the news lately, you already know that Bank of America (NYSE:BAC) is still suffering from its acquisition of Countrywide’s subprime loan portfolio. And its loss coverage reserves don’t quite measure up to that risk. Definitely a concern in today’s dismal housing market. If B of A can’t find a way to bring those loans to performing standards or offload them close to loan value, they’re going to take a big hit to earnings. Will investor support hold if the stock value continues downward? There could be worse problems to come.

While Bank of New York Mellon, the largest subsidiary of Bank of New York Mellon Corp. (BY), far exceeds regulatory risk-based capital requirements, its Tier 1 capital ratio is significantly below norm. Liquidity may be overly dependent on borrowing through the purchase of wholesale or non-core liabilities. The bank also exhibits rapid asset growth which can indicate aggressive pursuit of loan growth at the expense of quality underwriting, increasing potential for credit risk.

BNY Mellon NA, another subsidiary of the Bank of New York Mellon Corporation holding company, is one of the brighter spots in this group of institutions with capital levels in line with industry averages. Liquidity, one area of weakness, may be overly dependent on borrowing through the purchase of wholesale or non-core liabilities.

Citibank, a unit of Citigroup Inc. (NYSE:C), continues to struggle with nonperforming assets although they have declined since 2009, while at the same time reserve coverage and capital have increased. Profitability is also an issue for the institution with below-industry-average return on assets.

HSBC Bank USA, a subsidiary of HSBC Holdings PLC (HBC), has a high level of nonperforming loans relative to its capital and loss reserves. The bank exceeds regulatory capital requirements, but its Tier 1 capital is below norm indicating a need to enhance capitalization. The net interest margin component of earnings is substantially lower than average so the balance between asset yields and liability costs bears watching.

JPMorgan Chase Bank, owned by JPMorgan Chase & Co (NYSE:JPM), is dealing with nonperforming assets and capital issues. While the bank meets regulatory capital requirements, its ratio of net-worth-to-total-assets, another measure of available capital, is significantly below the norm. Its nonperforming assets are very high, and its loss reserve coverage is low in comparison.

Nonperforming assets of Wells Fargo Bank, the largest unit of Wells Fargo & Co (NYSE:WFC), are also very high, and its loss reserve coverage is substantially inadequate. Its risk-based capital has improved over the last several quarters, but resolution of the problem loans will need to improve before the bank is out of trouble.

These banking players are of greatest concern because of their far reaching business ties. Still too big to fail – maybe not this time around. The U.S. may just not have the stomach or the funds to bailout even one of these banks, let alone multiples.

But the banking industry problems are not just “big” deep. Many smaller, regional banks are struggling with similar issues. S&P generally reviews only the largest bank holding companies and their subsidiaries, so you can’t count on them for the complete picture even if timing improves.

So, what can you do to protect your assets and investments?

If you’re an investor, you need to be considering your options. At the very least, watch closely and be ready to act quickly.

Disclosure:

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.