June 21 (Bloomberg) — Credit Suisse Group AG’s credit
rating was cut three levels by Moody’s Investors Service, Morgan
Stanley was reduced two levels and 13 other banks were
downgraded in moves that may shake up competition among Wall
Street’s biggest firms.
Credit Suisse, the second-largest Swiss bank, received the
maximum reduction that Moody’s said in February it may make
during a review of global banks with capital markets operations.
Morgan Stanley and UBS AG (UBSN), the other firms singled out for such
a steep cut, were lowered two steps instead.
“All of the banks affected by today’s actions have
significant exposure to the volatility and risk of outsized
losses inherent to capital-markets activities” Moody’s Global
Banking Managing Director Greg Bauer said today in a statement.
The downgrades may force banks to post additional
collateral to trading partners in derivatives deals while
boosting the companies’ borrowing costs. Moody’s said when it
announced the review that it was seeking to reflect the banks’
reliance on fragile confidence in funding markets and increased
pressures from regulation and a difficult market environment.
The ratings firm said Feb. 15 it was reviewing grades for
17 banks. Moody’s cut Macquarie Group Ltd. (MQG) and Nomura Holdings
Inc. (8604) one level each in March. It also started a review of
lenders in more than a dozen European nations and already has
reduced grades in Spain, Germany, Italy, Sweden, Austria and
The downgrades may affect the competitive landscape in
derivatives that aren’t centrally cleared, a business that
provides about 15 percent of the industry’s trading revenue,
Kinner Lakhani, a Citigroup Inc. (C) analyst, wrote in an April 30
note. Banks with the largest cuts may lose revenue from such
long-term derivatives, Charles Peabody, an analyst with Portales
Partners LLC, said in a June 4 interview on the “Bloomberg
Surveillance” radio program.
“Right now there are a lot of internal bank policies that
if you’re doing a longer-term structured derivative, you want
the counterparty to be A-rated or above,” said David Konrad, an
analyst at KBW Inc. in New York. Because Moody’s is downgrading
the entire banking industry rather than one or two firms, “a
lot of those policies may be rewritten over time.”
A three-level cut for Morgan Stanley (MS) could cost it $400
million in annual trading revenue from those types of derivative
deals, estimated Brad Hintz, an analyst at Sanford C. Bernstein
Co., before Moody’s released its decisions.
The downgrades also may hasten obligations to post
additional collateral and termination payments. New York-based
Morgan Stanley said last month it may face payments of $9.61
billion in the event of a three-level cut from Moody’s and two
grades by Standard Poor’s, according to a filing based on
March 31 data. The total included $7.21 billion in collateral.
Credit Suisse said in its annual report that a three-level
downgrade in the bank’s long-term debt ratings would result in
additional collateral requirements or termination payments under
certain derivative instruments of 4.5 billion Swiss francs ($4.7
billion), as of Dec. 31. UBS said it would face 2.1 billion
francs of collateral calls from a two-level cut.
Banks’ large liquidity buffers will make collateral
requirements “manageable,” Amit Goel, a Credit Suisse analyst,
wrote in a May report.
“Pre-crisis bank ratings used to be clustered together,”
Lakhani wrote. “In the new world, dispersion has increased.
Markets tend to discriminate more between issuers at lower
ratings — in terms of funding costs. Over time, this could
provide a competitive edge for higher-rated firms,” including
HSBC Holdings Plc. (HSBA) and JPMorgan Chase Co. (JPM)
Morgan Stanley’s stock fell on June 4 to what was then its
lowest close since December 2008 as investors weighed a
potential credit-rating cut. The shares have rallied 15 percent
since then through yesterday.
Moody’s wrote on Jan. 19 that credit profiles of global
lenders are weakening as governments struggle with their
finances, and economic uncertainty and higher funding costs
persist. When Moody’s places a company’s ratings on review for a
downgrade, it typically decides whether to cut them within three
The ratings firm said Feb. 15 it was reviewing grades for
17 banks and securities firms with what it called “global
capital-markets operations.” That’s when it put Morgan Stanley,
Bank of America Corp. (BAC), Citigroup, Goldman Sachs Group Inc. (GS),
JPMorgan and Royal Bank of Canada (RY) on review for downgrades.
Moody’s has said all the reviews will be wrapped up by the
end of this month, after it delayed its rating actions on the
largest banks, which had previously been scheduled for mid-May.
“Moody’s is taking an appropriately deliberate approach
during this review process and will conclude when it is
confident that all relevant information has been received and
analyzed,” the firm said in an April 13 statement.
Events that have occurred since the review was announced,
including developments in the European debt crisis and
JPMorgan’s $2 billion trading loss, have forced Moody’s to take
longer with its decisions, said David Hendler, an analyst at
CreditSights Inc. in New York. Morgan Stanley Chief Executive
Officer James Gorman said this week that the review has been “a
long process to be hanging out there in the wind.”
Companies have spoken out against the Moody’s review,
citing the firm’s methodology and approach. UBS Chief Financial
Officer Tom Naratil said his firm’s financial position is
“completely inconsistent” with one that would have its short-
term rating cut from P-1.
Gorman said it would be “somewhat stunning” if his firm
was cut three levels given the bank’s increased capital and
liquidity. Goldman Sachs CFO David Viniar has said that he and
other executives “strongly disagree” with Moody’s approach.
“If you look at every single credit metric there is for
Goldman Sachs and frankly for many of our competitors, none of
the actions they’ve talked about are warranted,” Viniar said
during an April 17 conference call with analysts and investors
after the company reported first-quarter results. “We are, as
you know, we’re quite analytical. And when we do all of the
analysis, we cannot figure out why they are where they are.”
David Knutson, a Chicago-based credit analyst with Legal
General Investment Management, said Moody’s is in a difficult
business because it collects fees from the banks.
“When you upgrade someone, I imagine they’re happy to sign
the check because they earn it back in lower rates,” Knutson
said. “When you downgrade them, signing that check is a much
harder thing to do.”
To contact the reporters on this story:
Dakin Campbell in San Francisco at
Michael J. Moore in New York at
To contact the editors responsible for this story:
Rick Green at
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