index twoJPMorgan, BofA, Citigroup Among Big U.S. Banks S&P May Cut

 

This is a bloomberg.com article.

 

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are among eight large U.S. banks that may have credit grades cut by Standard & Poor’s on the prospect that the U.S. government is less likely to provide aid in a crisis.

The companies — along with Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp. — had senior unsecured and nondeferrable subordinated debt ratings placed on negative credit watch, S&P said Monday in a statement. S&P said it expects to resolve the credit reviews by early December.

The Federal Reserve approved a rule last week that will require large U.S. banks to hold a stockpile of debt that can be converted into equity if they falter. The rule on total loss-absorbing capacity, or TLAC, is a key part of regulators’ efforts to avoid another financial crisis.

“The action reflects our belief that U.S. regulators have made further progress and provided more clarity in enhancing their plans for resolving systemically important institutions,” S&P said in its statement. That lowers “the probability that the U.S. government would provide extraordinary support to these institutions to enable them to remain viable.”

Bond Performance

Bonds of U.S. banks have gained 2.03 percent in 2015, compared with a 4.7 percent return in the corresponding period last year, Bank of America Merrill Lynch index data show. The debt has gained 1.08 percent since the end of August, compared with 0.9 percent for dollar-denominated investment-grade corporates.

Because the bank’s creditors would end up providing support under the Fed’s rule, S&P said it’s taking no negative actions on the eight banks’ operating entities. The ratings firm placed “core and highly strategic operating subsidiaries” of Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley on credit watch positive. That review includes issuer credit ratings and senior unsecured debt ratings.

“With this new rule, fixed-income investors would consider asking for higher yield to hold bank capital debt because of the larger downside with the U.S. government backing off,” said Hou Wei, a banking analyst at Sanford C. Bernstein & Co. in Hong Kong. “For equity investors in those banks, they may need to ask for higher returns as well because their holdings could be diluted if bank capital debt is forced to be converted into equity.”

Ratings Impact

S&P’s long-term issuer rating for Wells Fargo, BNY Mellon and State Street is A+, the fifth level of investment grade. JPMorgan is one step below at A, and the four other banks are rated A-, which is four steps above speculative grade.

Ratings cuts typically raise borrowing costs and force banks to increase collateral. Still, the impacts aren’t always clear. When Moody’s Investors Service downgraded 15 of the largest banks in June 2012, the stocks and bonds of the firms rose on relief that the cuts weren’t more severe.

If U.S. banks were to fail, investors in their stock would lose everything, but the debt would be converted into equity in a new, reconstituted bank under the Fed plan. It’s an element of the so-called living wills banks must submit to the regulator and Federal Deposit Insurance Corp. each year to map out their hypothetical demise.

The banks subject to the Fed proposal are singled out by S&P. The regulator’s plan is open to comments from the public until Feb. 1.

Spokesmen for Bank of America, Citigroup, Goldman Sachs and Morgan Stanley declined to comment on S&P’s announcement. Representatives of BNY Mellon, JPMorgan, State Street and Wells Fargo didn’t immediately return messages.

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