Moody’s downgrades credit ratings of 15 major banks
NEW YORK — The credit ratings of 15 major banks were slashed Thursday, the latest setback for an industry grappling with global economic turmoil and weak profits. The decision by Moody’s Investors Service to cut banks’ credit scores to new lows could further damage their bottom lines and unsettle markets even more.
Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After two-notch downgrades, their credit ratings now stand just two levels above junk.
‘‘The risks of this industry became apparent in the financial crisis,’’ said Robert Young, a managing director at Moody’s. ‘‘These new ratings capture those risks.’’
Banks have struggled to improve their profits against the backdrop of the European sovereign debt crisis, a weak US economy, and new regulations.
The downgrades may amplify their problems. With lower ratings, creditors could charge the banks more on their loans. Big clients may also move their business to less-risky companies, further crimping earnings. As bank profits falter, consumers could feel the pain. Companies often try to make up for lost revenue by passing costs on to customers. In the face of new regulations, banks have raised fees.
Moody’s downgrades are part of a broad effort to make its analysis more rigorous. During the financial crisis, Moody’s and rivals like Standard & Poor’s got black eyes for slapping high ratings on mortgage bonds that later imploded. Moody’s approach reflects its belief that large banks have fundamental weaknesses.
Now, bank executives will now try to convince their creditors and large customers that Moody’s has overreacted. The executives will probably highlight moves they have made since the crisis.On Thursday, Citi said Moody’s approach ‘‘fails to recognize Citi’s transformation over the past several years,’’ adding that ‘‘Citi strongly disagrees with Moody’s analysis of the banking industry.”
Bank of America echoed such sentiments: ‘‘In addition to strengthening our governance and risk management, Bank of America ended the first quarter of 2012 with record capital ratios.’’
Those capital positions, which are banks’ main buffer against losses, could be a point of strength across the industry. The lack of capital in the crisis left the financial system vulnerable, prompting the government to bail out many of the industry’s largest banks.
Since then, they have significantly increased their cushions. Today, Morgan Stanley’s capital is twice what it was in 2007.
‘‘The banking system is safer today than any time in the last 30 years,’’ said Gerard Cassidy, at RBC Capital Markets. ‘‘We have not seen capital levels like this since the 1930s.’’
Even so, Moody’s remains concerned. It saw several weaknesses in the banks’ Wall Street operations, including their complexity and opacity. Moody’s highlighted a history of volatile profits and problems with risk management.
Moody’s mentioned the recent trading debacle at JPMorgan Chase. In May, the bank disclosed that a bet on financial instruments tied to corporate bonds had soured; those losses could reach $5 billion.
The credit rating agency also noted the industry’s continued dependence on short-term loans to finance their Wall Street operations. This type of credit dried up quickly in the crisis, forcing them to borrow from the government.
Some banking experts welcomed the downgrades, saying t rating agencies are finally beginning to reflect the risks.
‘‘These downgrades are good news,’’ said Anat R. Admati, a professor of finance and economics at Stanford University.
‘‘Right now, their balance sheets are very fragile.’’