We have heard it all before; Moody's is ready to announce downgrades on some big banks like Bank of America (BAC). Well whoop-di-doo folks - what is the news here? Does anyone really care about this anymore? I mean the entire country was downgraded for crying out loud, and since then the market has rallied and we are still the safe haven for money around the globe.
Here is the latest from bloomberg.com:
"UBS, Credit Suisse and Morgan Stanley (MS)'s credit ratings may be cut by as many as three levels, Moody's said in February. Barclays, BNP Paribas SA (BNP), Credit Agricole SA (ACA), HSBC Holdings Plc (HSBA),Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Macquarie Group Ltd. and Royal Bank of Canada (RY) may be lowered by two, Moody's said.
Bank of America Corp., Nomura Holdings Inc. (8604), Royal Bank of Scotland Group Plc (RBS) and Societe Generale SA (GLE) may be lowered by one grade, it said."
We have already deemed the banks that are bound to be downgraded as "too big to fail" and not only that, the big banks have been actively cleaning up their balance sheets, and have been making more money without much risk, right?
The banks certainly have not made it easy to get loans or mortgages have they? There is very little reward for the risk right now, and for investors, that is a very good scenario. It might not be as consumer friendly as folks might like, but as a shareholder we should be embracing this landscape right now.
So What Happens When Moody's Downgrades The Banks?
It is my opinion that absolutely nothing will happen. I think much of this noise has already been backed into the share prices of all the banks anyway.
Take for example my current financial sector favorite, Bank of America. They might be downgraded one notch, according to Moody's.
Today the stock is down with the market, as well as the Moody's "noise," but seriously, wouldn't the price be much further down than it is now given that we have been reading the same headlines for weeks?
The share price of Bank of America has shown great resiliency since it passed the $5.00 mark, and has made up almost all of the recent dips to where it is today.
One would think if the news were of any importance, that the share price would have plunged under $7.00 once again. To me, that means that this will be a non-event going forward.
Does this scare you? ;
The Financial Industry Regulatory Authority has fined Bank of America Corp.'s Merrill Lynch unit $2.8 million for overcharging nearly 95,000 customers $32 million in unwarranted fees, and for failing to provide certain required trade notices.
C'mon, I think that was my last ATM charge! OK, I am being a bit over the top, but really, that is the sort of news the downgrade is - a big nothing.
If anything, the price dip might give investors another opportunity to get into Bank of America stock before it goes past $10.00/share and never looks back. Can that happen? I think so, if they continue on the current positive path of making money easily (few risky loans) and balance sheet clean-up.
U.S. bank stocks led the financial sector modestly higher on Thursday morning as a prominent analyst said in a research note that any Moody's downgrades of the firms' credit rating appear to be priced in to the stocks. Mike Mayo, an analyst at CLSA, made the comments in a research report. Mayo said he did not expect the anticipated downgrades to affect the banks' funding costs.
As of now, the banks have reversed course and are down today so far. To me that gives investors interested in buying anything in this sector an opportunity.
Personally I like Bank of America as I believe it is undervalued, cheap (price wise), has a little dividend, and the balance sheet is looking really good, as I noted in most recent article:
- The current market cap is about $85 billion vs an enterprise value of about $150 billion (almost half the value right here)
- An extremely low forward PE of about 7.80
- The current share price to book value is at .38
- It has roughly $640 billion in cash on the balance sheet
- The recent calculated book value per share is $19.83
So here is my bottom line: Do your own research, and if you believe as I do that financials will ultimately lead the way, then I feel Bank of America can give us the most bang (or bank) for our buck.
Buy low, sell high! Still works.
Disclosure: I am long BAC.