Ratings or no, investors cast their lots with banks

Article by: DAKIN CAMPBELL and MICHAEL J. MOORE , Bloomberg News
Updated: June 22, 2012 - 8:12 PM

Stocks of most of the big banks whose ratings were cut by Moody's on Thursday actually rose on Friday.

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FILE -- Morgan Stanley's headquarters in New York, Nov. 25, 2008. On Thursday, June 21, 2012, Moody's Investors Service has lowered the ratings of some of the world's largest banks, including Morgan Stanley Bank of America, JPMorgan Chase, and Citigroup.

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Moody's Investors Service suffered a downgrade of its own Friday as markets responded to the company's rating cuts of 15 of the world's largest banks by bidding up the value of their stocks and bonds.

Shares of 10 of the firms affected by Thursday's action rose Friday, and the cost to protect Morgan Stanley debt against losses dropped to the lowest in more than seven weeks, according to data compiled by Bloomberg, after the bank was cut two levels rather than a threatened three grades. Credit-default swaps tied to Bank of America Corp., which was lowered to within two levels of junk along with Citigroup Inc., also improved. The Bloomberg Europe banks and financial services index added as much as 1.5 percent.

"The ratings agencies themselves are looking for a raison d'être" as regulations in the U.S. and Europe try to reduce investors' dependence on the credit assessments, David Zervos, chief market strategist at Jefferies & Co., said in an interview. "They like to be noisy, and this is a way to be noisy. I don't think the effects are big in the end."

The prospect of downgrades had weighed on banks since Moody's said Feb. 15 it was reviewing 17 financial firms with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. Pressure mounted as Europe's sovereign-debt crisis intensified and cast doubt on the health of some of the continent's lenders.

By the time the results came out four months later, investors such as Thornburg Investment Management Inc.'s George Strickland had concluded the worst-case scenario for downgrades was already reflected in securities prices.

"If anything, the market is reacting with relief," said Strickland, who helps oversee $14 billion of fixed-income assets as a managing director at Santa Fe, N.M.-based Thornburg. Morgan Stanley bonds likely will rally, said Strickland, whose firm owns the firm's debt. "The market is shrugging it off."

The review concluded with none of the financial firms cut more than Moody's had forecast, removing a drag on bank stocks brought on by the uncertainty, David Konrad, a KBW Inc. analyst in New York, wrote Friday.

"We view the Moody's downgrade as another overhyped story of 2012," David Trone, analyst at JMP Securities, wrote to his clients. "The corporate market thinks for itself, and credit rating agencies are often lagging indicators."

Financial stocks in the Standard & Poor's 500 index climbed 0.9 percent. JPMorgan Chase & Co. and Bank of America each advanced more than 1.3 percent and ranked among the seven biggest gainers in the Dow Jones industrial average.

Of the 15 banks that saw their ratings cut, five were based in the United States: Bank of America, Citigroup, Morgan Stanley, Goldman Sachs and JPMorgan Chase.

Credit-default swaps on Morgan Stanley declined 31.9 basis points to 356.8 basis points on Friday, according to prices compiled by data provider CMA. That's the lowest since May 3. Swaps are used to protect investors against losses on company debt, and the price increases along with doubt about a firm's creditworthiness, so Friday's decline reflects an improving outlook.

Morgan Stanley's long-term senior unsecured debt rating was reduced two grades to Baa1, and nine other firms received two-level reductions, Moody's said Friday. Credit Suisse Group AG's rating was lowered three levels to A2 and Zurich-based UBS AG, the other firm singled out for a potential three-level cut, dropped just two instead.

The rating cuts underscore how much less creditworthy Moody's views global banks compared with smaller rivals. Minneapolis-based U.S. Bancorp, the fifth-largest U.S. bank by deposits, is still rated Aa3, five levels higher than fourth-ranked Citigroup or Bank of America.