Moody's downgraded credit ratings for 28 Spanish banks amid the county's real estate bubble burst. The agency attributed the ratings cut to a weak financial position, which will make it difficult for Spain to make payments on its sovereign debt. By the end of January this year, five of the largest U.S. banks had a collective exposure of more than $80b to Greece, Ireland, Italy, Portugal and Spain (GIIPS). This exposure has dropped considerably, which is why large cap U.S. banks trade on their own fundamentals and catalysts, and not so much on the European news.
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Citigroup had a gross funded credit exposure to GIIPS nations of $20.5b as at March 31, 2012, as compared to $25.7b in January this year. Its net current funded credit exposure dropped by a significant 63% from $16.3b to $6b over the same period. Its gross and net exposures as a percentage of Tier 1 capital is 16.8% and 5%, respectively, as at March 31, 2012. Citigroup's extensive use of credit default swaps, combined with its ever-expanding global footprint, enable it to hedge the adverse situation in Europe. We had earlier maintained a buy recommendation for Citigroup.
Down from $3b in January, Morgan Stanley's net exposure for the indebted European nations touched $2.41b in March. With 60% of its total exposure to GIIPS hedged, Spain stands to be the nation to which Morgan Stanley is most exposed. Spain accounts for $1.3b or 54% of the $2.41b exposure outstanding. Morgan Stanley's net exposure as a percentage to its Tier 1 capital dropped to 4.5% in March. Moody's recognized the improvements in Morgan Stanley's risk management, and therefore did not downgrade it by the signaled 3 notch. It was downgraded instead by 2 grades.
Bank of America (BAC)
Net exposure for the Bank of America, net of hedges, was $13b in January, which reduced to $9.8b by March this year - a drop by 24%. This makes it 7.5% of the Tier 1 capital. BAC was downgraded by only one notch, and its stock is up 37% on a year to date basis. Bank of America's stock would trade more on activity in the U.S. mortgage and real estate markets as compared to activity regarding the Spanish banks' credit rating cut.
The managements of Goldman Sachs (GS) and JP Morgan Chase (JPM) have not been clear on their exposure levels to GIIPS. However, both will trade on their self-inflicted wounds. Goldman Sachs has lost its status as the employer of one of the most talented workforces in the industry. Most of its top executives are resigning, while accusing the bank of losing its moral fiber, which is why it has not been able to capture a share in a growing underwriting market. We have a sell recommendation on Goldman Sachs. The outcome of JPM's recent $2b hedging loss inquiry will play a pivotal role in the future performance of its stock, which is 7.8% up year to date.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.