Moody's Signals Possible Downgrades for Bank of America, Citigroup and Wells Fargo

Includes: BAC, BK, C, GS, JPM, MS, STT, WFC
by: Research Recap

Just as it did with U.K. banks, Moody's has put some U.S. banks on review for downgrade based on the prospect of reduced systemic support.

Moody's today placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (NYSE:BAC)(A2 senior), Citigroup Inc. (NYSE:C)(A3 senior), Wells Fargo & Company (NYSE:WFC)(A1 senior), and their subsidiaries on review for possible downgrade.

Each of these ratings currently incorporates an unusual amount of “uplift” from Moody's systemic support assumptions that were increased during the financial crisis. The review will focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support.

At the same time, Moody's said that it will assess improvements in Bank of America's and Citigroup's standalone financial strength, and that this may temper the extent of any ratings downgrades that could result from its review of these firms' unusual level of systemic support.

Moody's also placed the Prime-1 ratings of Bank of America's and Citigroup's holding companies on review for possible downgrade. The Prime-1 rating of Wells Fargo's holding company, Wells Fargo & Company, was affirmed. Moody's also affirmed the Prime-1 ratings of all three companies' banking operations, including the Prime-1 ratings of Bank of America, N.A., Citibank, N.A., and Wells Fargo Bank N.A.

These actions had no impact on the FDIC-guaranteed debt issued by these firms, which remain at Aaa with a stable outlook.

Today's rating actions reflect Moody's view that, in light of developments on the Dodd-Frank Act that have occurred to date, the unusual levels of uplift incorporated into the ratings of Bank of America, Citigroup, Wells Fargo may no longer be appropriate.

Moody's also continues to evaluate whether it should reduce to below even pre-crisis levels its support assumptions for the eight U.S. banks that currently benefit from ratings uplift. In this context, the rating outlook on the deposit, senior debt, and senior subordinated debt ratings of Bank of New York Mellon (NYSE:BK) has been changed to negative from stable. This brings its outlook into line with that of the other US banking groups whose debt and deposit ratings benefit from government support assumptions: JPMorgan Chase & Co. (NYSE:JPM), The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), and State Street Corporation (NYSE:STT).

Unlike the three institutions placed on review today, the support assumptions incorporated into these five groups' ratings are not unusual — they remain similar to, not higher than, what they were before the crisis. Although Moody's considers it unlikely that it will withdraw all government support from the ratings of these eight banking groups, the agency will continue to evaluate the amount of uplift derived from support assumptions as regulators write and promulgate rules and regulations that could increase their ability to resolve these institutions without triggering contagion and broader systemic risk. Given these potential developments, over time this could lead to Moody's reducing its support assumptions for these eight firms to below even pre-crisis levels.

Bank level
(Click to enlarge)