Some American banks may see their ratings cut

From The New York Times' Dealbook:

One of Wall Street’s most influential securities analysts is telling investors to brace themselves: some of the nation’s biggest banks could be on the cusp of a credit rating downgrade.

In a new report, Glenn Schorr, who covers brokerage firms and banks at Nomura, says that while “it’s not a done deal, at present, Bank of America, Citigroup and Morgan Stanley appear most at risk of being downgraded to Tier 2 status.”

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“While balance sheets are in better shape and fundamentals are improving, the pace of recovery is likely a bit slower than the agencies were expecting,” Mr. Schorr wrote in his report. Among other things, banks are facing new challenges like European sovereign risk and the negative impact of regulatory reforms on revenue.

The lower credit ratings could reflect changes in the assumed levels of government support that the rating agencies have assigned the banks.

Mr. Schorr says in his report that the rating agencies assume a certain level of government backing of banks, meaning the agencies don’t think the system or the government is going to let banks fail if they got into trouble. Some firms like Bank of America have four notches of government support in their Moody’s rating, he writes. Meanwhile, other banks, like JPMorgan Chase, have no assumed government support in its S.&P. rating, he says.

The bottom line: Downgrades would ultimately drive up financing costs and make it more difficult for the affected banks to compete in businesses like prime brokerage.

The analyst suggests any cuts, if they happen at all, will be manageable but I have my doubts. It would not surprise me if these banks enter a cycle of deterioration if ratings are cut.