NEW YORK (AP) - Moody's Investors Service lowered the credit ratings of 15 major banks Thursday, including Bank of America, JPMorgan Chase and Goldman Sachs, saying their long-term prospects for profitability and growth are shrinking.
The ratings agency said it was especially concerned about banks with significant financial markets businesses because those markets have become so volatile. Some of the largest European banks were also downgraded, including Barclays, Deutsche Bank and HSBC.
These banks were vulnerable to "outsized losses," Moody's global banking managing director Greg Bauer said in a statement. These behemoth banks are all major players in the global stock and bond markets, which have become extremely volatile. However, Bauer pointed out that some of the banks, like JPMorgan Chase and HSBC, have buffers in more stable businesses which could act as "shock absorbers" during a crisis.
Moody’s Investors Service lowered the credit ratings of 15 the largest banks late Thursday, including JPMorgan Chase, Bank of America, and Goldman Sachs.
The downgrades reflect Moody's concern over the ability of the banks to repay their debts during times of crisis. Moody's had said in February that it was considering downgrading the credit ratings of major banks in the U.S. and in Europe.
A downgrade usually means banks will have to pay more for its debt. Investors demand higher interest for riskier debt, which is what the downgrades represent. However, with interest rates already at rock-bottom levels, the downgrades may not affect the cost of funding for the banks that much.
The stock market has also priced in any negative impact from the ratings downgrades, according to Bert Ely, a banking consultant in the Washington, D.C. area. "They've been telegraphing this thing for months," Ely said.
In a sign that investors were taking the news in stride, stocks of major U.S. banks rose in after-hours electronic trading. Moody's made its announcement after regular trading had closed. Morgan Stanley rose the most, 3.3 percent, gaining 45 cents to $14.41. JPMorgan Chase rose 41 cents to $35.92 and Bank of America rose 12 cents to $7.94.
Citigroup said in a statement that it "strongly disagrees" with Moody's assessment. Citi said it doesn't believe the downgrade will impact the bank's funding costs because the ratings actions have already been expected by the market and its business partners have included them in their analyses. Morgan Stanley also disagreed with the action.
In its report, Moody's didn't treat all large banks alike. It sorted the banks it was downgrading into three categories, with JPMorgan, HSBC, and Royal Bank of Canada in the top one.
Moody's said those firms have stable businesses that offset losses from the volatile markets businesses. JPMorgan, for example, has a large base of consumer deposits and major lending, credit card and asset management businesses.
These banks have also managed to contain their exposure to risky European government debt, Moody's said. While all three were downgraded, their debt had the highest ratings among the 15 banks affected.
The second group included Goldman Sachs, Deutsche Bank and Credit Suisse. Moody's said these firms rely heavily on their markets businesses to satisfy their shareholders, although some of them managed their risk effectively.
In its last group were the weakest banks - Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland. Moody's said these banks have either had "problems in risk management or have a history of high volatility," and some of them have implemented business strategy changes.