Moody’s reviewing BofA, Citi, Wells for possible downgrade

Moody’s Investors Service (MCO) plans to review its debt ratings for some of the nation’s largest financial institutions to determine if adjustments are needed to remove the impact government bailouts had on the banks. Analysts will assess the standalone financial strength of Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) to see what the banks have done to improve their risk profile over the past few years. Moody’s rates the senior debt of BofA at A2, Citigroup at A3 and Wells Fargo at A1. Analysts said the review doesn’t affect the triple-A ratings assigned to debt issued by these firms and guaranteed by the Federal Deposit Insurance Corp. “This may temper the extent of any ratings downgrades that could result from (Moody’s) review of these firms’ unusual level of systemic support,” the ratings agency said Thursday. Moodys said its ratings for BofA, Citi and Wells “may no longer be appropriate” because of the regulatory changes included in the sweeping reforms of the Dodd-Frank Act. “The U.S. government’s intent under Dodd-Frank is very clear,” Moody’s Senior Vice President Sean Jones said. “It does not want to bail out even large, systemically important banking groups.” Jones said Moody’s continues to believe “such a group could not be resolved without risking a disorderly disruption of the marketplace and the broader economy.” “Even so, the support assumptions built into these three banks’ ratings are unusually high, which may no longer be appropriate in the evolving post-crisis environment,” he said. In addition to potential downgrades at the three banks, Moody’s is also reviewing its government-support assumptions for another handful of U.S. banks benefiting from what the ratings agency calls “uplift.” Due to this review, analysts lowered the outlook for Bank of New York Mellon (BK) to negative from stable, bringing it in line with JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS) and State Street Corp. (STT). “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,” according to Moody’s. Analysts said BofA, Citi and Wells have increased “equity through internal capital generation, and most of their asset quality indicators have improved.” They have considerable exposure to residential mortgages and credit costs could spike if the economy contracts again, according to Moody’s. Also, the costs these banks face from mortgage repurchases and increased litigation from the robo-signing debacle place additional stresses on their ratings. “Other considerations will include the potential effectiveness of changes in risk management at Bank of America and Citigroup, given their poor performance during the credit crisis and their still sizable capital market activities, which we view as both opaque and volatile,” Jones said. “While ongoing capital plans will also be important in our assessment.” Write to Jason Philyaw.