Why Moody's 15 bank downgrades matter

Ratings cuts can cost global banks big money. But regional banks could find opportunity in the fallout.

By Jim J. Jubak Jun 21, 2012 6:19PM
Thursday's downgrade of 15 big global banks is just the latest stop on Moody's Investor Service's world tour of the financial sector. 

In February, Moody's announced it would review the credit ratings of 17 global investment banks. On May 14, it downgraded the credit ratings of Italian banks UniCredit and Intesa Sanpaolo (ISNPY). On May 18 it downgraded 16 Spanish banks, including Banco Santander (SAN). June 6 brought downgrades to seven German and three Austrian banks.

Thursday, Moody’s downgraded Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland Group, Societe Generale, and UBS. (Moody’s had already downgraded Macquarie Group and Nomura Holdings on March 15.)

Bank stocks were hammered in anticipation of the downgrades. For example, shares of Bank of America (BAC) fell 3.93%, shares of HSBC (HBC) declined by 2.46%, and shares of JPMorgan Chase (JPM) dropped 2.58%. The drop in bank shares helped power Thursday’s 2.23% fall in the Standard & Poor’s 500 stock index.

Why do the downgrades matter? Because they costs banks money.

For example, before the Moody's announcement, Morgan Stanley (MS) estimated that a three-notch downgrade to Baa2 would force the bank to put up more collateral for about 8% of its derivatives contracts. That could have cost the company somewhere between $868 million and $7.2 billion in additional collateral and termination payments, according to filings with the Securities & Exchange Commission. As for the other banks, a one-notch downgrade for Bank of America could mean the bank has to put up an additional $2.7 billion in collateral. A two-notch downgrade for Citigroup (C) could cost the bank an additional $4.7 billion in collateral. A two- notch downgrade to Goldman Sachs (GS) could cost $2.2 billion in additional collateral.

Of the 15 banks in the list Thursday, Moody's gave a three-notch downgrade to just one, Credit Suisse. Morgan Stanley, which had been expected to get a three-notch downgrade, was downgraded by just two notches. (The stock rallied in afterhours trading by 3.6%)

Ten banks got two-notch downgrades, including JP Morgan Chase, Goldman Sachs, and Citigroup.

The opportunity from all this may lie in the shares of the bigger regional banks such as U.S. Bancorp (USB), PNC Financial Services (PNC) and BB&T (BBT). Those stocks were hit Thursday in sympathy with the big global investment banks -- PNC Financial fell 2.04%, for example -- but the big regionals don’t have the complex trading and derivative operations that are hurting the global investment banks, and they look like they're taking market share in such bread-and-butter bank business as commercial lending. (U.S. Bancorp is a member of my Jubak’s Picks portfolio.)

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Banco Santander and U.S. Bancorp as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here
303Comments
Jun 21, 2012 10:35PM
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The banks won't loose one cent. Watch the charges go up. And don't forget them crying to congress for help. The only ones who will loose are the tax payers as usual.
Jun 21, 2012 6:35PM
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They deserve it and we'll pay the price !
Jun 21, 2012 7:22PM
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These banks are not "Too Big To Fail". They are "Too Stupid To Rescue."

Let them go bankrupt, and let's not bail them out.

Jun 21, 2012 11:11PM
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All TARP did was extend the pain. We should have let the market correct 4 years ago. Stop bailing everybody out and giving everybody subsidies and the real market price for everything will be exposed. We still have not reached bottom. 
Jun 21, 2012 7:24PM
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There is a solution for banks that are "Too Big To Fail".

Move your money to a local credit union.
If enough people did this, problem solved.

That makes big banks small enough to ignore when they fail.

Jun 21, 2012 10:30PM
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Since we just recently bailed out the banks, and slightly over 20 years ago bailed out the savings and loans, using money we borrowed from the Federal Reserve..maybe this time the Federal Reserve should bail out their own.

Heck, the Fedreal Reserve is the largest private bank in the US, and they have the gaul to charge us interest for them to print money because our government is to lazy to take back that responsibility..So far, the Federal Reserve has been no friend of the US citizen or our government.

Jun 21, 2012 6:40PM
Jun 21, 2012 9:09PM
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This doesn't hurt the banks one bit. What do they care? Any increased costs they incur will just be passed on to the customer. That's why BP will never care about the Gulf oil spill. They're getting more than paid back in higher gas prices. The little guy always loses when it comes to big business. Always. 
Jun 21, 2012 10:20PM
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How do you guys NOT see that the rating should have been dropped long ago?! Like when the banks first started stealing all of our savings and shoving the cash into their pockets. Then they get bailed out and all is good with the world. Well, eventually it catches up. Don't spend too many tears on the banks. They're laughing all the way home. I'm disgusted as a republican to say this corporate greed is all on the greedy republicans back. How anyone can try to pin this on Obama is a joke. Wall St/Lawyers/Lobbyists/Politicians - all crooked. Is there ANYONE out there that cares about real Americans?
Jun 21, 2012 6:54PM
Jun 21, 2012 11:17PM
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Read this book guys, it's call "The Harbinger" it's about America's future, prediction! Read it for yourselves. It really makes a lot of sense! We can all go back and forth commenting but we all have to make a decision one way or the other. It is very interesting! The first collapse of our financial institutions ( or our economy) was in 2008, 7 years right after 9/11. The next collapse will be around 2015 (7years later) and it shall be worst than the first. Wake up America before it's too late. Our money sates "In God we trust". This "god" is called "greed" care about yourselves and forget about the others. "but the root of all evil is the love of money" this is where America stands right now. "For the absence of heat is cold and the absence of light is total darkness" so the absence of God in a nation is total chaos" keep taking God out of the equation and see for yourselves what happens! 
Jun 21, 2012 6:35PM
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Now the banks will have to pay more to the FED to borrow, which is like a tax increase.
Jun 21, 2012 6:40PM
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This is a tax increase on everybody.  All us will pay one way or another.  When it really hits us, maybe we will finally take our debt more seriously.
Jun 21, 2012 9:50PM
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All banks should have been down graded 10 years ago
Jun 21, 2012 9:07PM
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Downgradedwhoopppeeee.. These freakin low life crooks need to be imprisoned or hung by th neck until dead!!! These are who is responsible for what the economy is and what has happened to the everyday working people. Big deal downgraded!!!!
Jun 21, 2012 7:11PM
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People seriously need to wake up, the people who run the system are screwing everyone and making money off YOUR misery, they need to be identified and thrown in jail!

 

Get informed, pay attention and get your butt out there!  It's not going to get better until people make it known they won't stand for it anymore!

Jun 21, 2012 7:25PM
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Banks investing in derivatives or other potentially losing propositions should be eliminated.  We taxpayer will share as all domestic banks are insured by FDIC and also got TARP funds.  The investment arm of Chase Morgan ($2 Billion loss low estimate) was done in their London Bank office whose loss would be covered by FDIC.  This was not a separate investment corporation in London but a Chase Morgan satellite office in London.  It was bad enough when Bush bailed out AIG and most of the money went to foreign banks but now we insure foreign offices of domestic banks.  Talk about getting screwed several directions at the same time.  Wake up congress and government regulators!  Taxpayers start screaming at your senators and representatives.
Jun 21, 2012 8:56PM
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The same people that destroyed trillions in our 401K's are after our social security. The big lie about SS being insolvent on account of so many retiries. This bunch of thieves need to be regulated and in no way should they ever get their grubby hands on SS.
Jun 21, 2012 10:20PM
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Let all the banks rot to hell, Maybe we the people can foreclose on their banks houses cars airplanes etc see how they like it
Jun 21, 2012 8:48PM
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Bank executives should be ashamed. It is people's deposits/investments on which they are rewarding themselves millions of dollars each at the expense of depositors, who do not get any rewards for their deposits/investment but get penalized in the form of additional fees. Despite their own misadventures in wrongful investments which result in big losses, the bank executives still end up earning multimillion dollars for themselves. They are cheating the depositors of their fare rewards.

A concerned depositor.
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