Bank Of America Rallies Despite Moody's Warning: Fundamentals Not Impacted

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Despite Moody's downgrade warning, Bank of America (BAC) rallied almost 4 percent on Thursday as a possible downgrade does not impact the fundamentals of the company.

Financials were pressured on Wednesday by a warning from Moody about possible downgrades to credit ratings of 17 global and 114 European financial institutions.

Brushing off the warning, the Financial Select Sector SPDR ETF (XLF), which tracks the financial stocks in the S&P 500 index, rose 1.6% with Bank of America leading at almost 4 percent. Citigroup (C) and American International Group (AIG) both gained about 3 percent, while J.P Morgan Chase (JPM) gained about 1.6 percent.

The S&P 500 hit a nine-month high in hopes for a deal on Greek bailout. Greece expects to get approval on Monday from eurozone finance ministers to begin a debt swap with private bondholders in an effort to avoid a disorderly default.

So far this year, Bank of America continues to outperform its peers. Bank of America entered 2012 with a stronger balance sheet. The company's capital ratios and credit quality improved in the final quarter of 2011 making it attractive to buyers.

As of the beginning of this month, Bank of America shares have soared almost 10 percent as of Thursday's close.

The Moody's announcement of a possible downgrade didn't come as a complete surprise. On January 18, Moody's warned that a number of European banks were likely to be placed on review for downgrade in the first quarter of 2012.

In a release announced late Wednesday, Moody's said:

Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.

Many of the banks on Moody's list, including Bank of America, are systemically important global financial institutions, essentially those that are too big to fail. For that reason, the current review and possible downgrade doesn't necessarily pose a big risk to these banks or their fundamentals.

Bank stocks are highly dependent on the housing market, the domestic economy, and the international landscape. On that front, the Labor Department said jobless claims fell by 13,000 to a seasonally adjusted 348,000 last week, the lowest since March 2008, when the U.S. was in the early stages of a recession.

Moreover, the Census Bureau and the Department of Housing and Urban Development also announced housing starts for January rose 1.5% to a seasonally adjusted annual rate of 699,000.

As evident by Thursday's rally, investors did not pay attention to Moody's warning and instead chose to act on Greek bailout hopes and positive U.S. economic data on jobs and housing.

Disclosure: I am long BAC.

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