Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade. Each of these ratings currently incorporates an unusual amount of "uplift" from Moody's systemic support assumptions that were increased during the financial crisis. The review will focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support. At the same time, Moody's said that it will assess improvements in Bank of America's and Citigroup's standalone financial strength, and that this may temper the extent of any ratings downgrades that could result from its review of these firms' unusual level of systemic support.
Moody's also placed the Prime-1 ratings of Bank of America's and Citigroup's holding companies on review for possible downgrade. The Prime-1 rating of Wells Fargo's holding company, Wells Fargo & Company, was affirmed. Moody's also affirmed the Prime-1 ratings of all three companies' banking operations, including the Prime-1 ratings of Bank of America, N.A., Citibank, N.A., and Wells Fargo Bank N.A.
These actions had no impact on the FDIC-guaranteed debt issued by these firms, which remain at Aaa with a stable outlook.
MOODY'S CONTINUES TO ASSESS THE IMPACT OF THE DODD-FRANK ACT
Regulatory authorities continue to make progress in rulemaking, however, the final shape of the landscape remains uncertain. Today's rating actions reflect Moody's view that, in light of developments on the Dodd-Frank Act that have occurred to date, the unusual levels of uplift incorporated into the ratings of Bank of America, Citigroup, Wells Fargo may no longer be appropriate.
"The US government's intent under Dodd-Frank is very clear," says Senior Vice President Sean Jones. "Going forward, it does not want to bail out even large, systemically important banking groups." Mr. Jones notes however that Moody's continues to believe that such a group could not be resolved without risking a disorderly disruption of the marketplace and the broader economy. "Even so, the support assumptions built into these three banks' ratings are unusually high, which may no longer be appropriate in the evolving post-crisis environment," added Jones.
Moody's also continues to evaluate whether it should reduce to below even pre-crisis levels its support assumptions for the eight US banks that currently benefit from ratings uplift. In this context, the rating outlook on the deposit, senior debt, and senior subordinated debt ratings of Bank of New York Mellon has been changed to negative from stable. This brings its outlook into line with that of the other US banking groups whose debt and deposit ratings benefit from government support assumptions: JPMorgan Chase & Co, The Goldman Sachs Group, Inc., Morgan Stanley, and State Street Corporation.
Unlike the three institutions placed on review today, the support assumptions incorporated into these five groups' ratings are not unusual -- they remain similar to, not higher than, what they were before the crisis. Although Moody's considers it unlikely that it will withdraw all government support from the ratings of these eight banking groups, the agency will continue to evaluate the amount of uplift derived from support assumptions as regulators write and promulgate rules and regulations that could increase their ability to resolve these institutions without triggering contagion and broader systemic risk.
Given these potential developments, over time this could lead to Moody's reducing its support assumptions for these eight firms to below even pre-crisis levels.
SUPPORT FOR BOFA, CITI, AND WELLS FARGO EXCEEDS PRE-CRISIS LEVELS
Moody's government support assumptions for Bank of America, Citigroup, and Wells Fargo are higher than what similarly rated institutions would have received prior to the crisis. For example, Bank of America N.A.'s and Citibank N.A.'s C- (C minus) unsupported BFSRs translate to a Baa2 rating on Moody's long-term debt scale; prior to the crisis a similarly rated, systemically important bank would typically have benefited from no more than three notches of uplift, meaning its ratings would be no higher than A2. Currently, Bank of America receives five and Citibank four notches of uplift from government support assumptions, bringing their senior ratings to Aa3 and A1, respectively. Wells Fargo's unsupported BFSR of C+ (C plus) translates to an A2 rating on Moody's long-term debt scale; prior to the crisis a similarly rated, systemically important bank would typically have received no more than two notches of uplift, to Aa3.
Currently, Wells Fargo's Aa2 senior rating benefits from three notches of uplift.
CONSIDERATION OF IMPROVEMENTS IN STANDALONE FINANCIAL STRENGTH OF BANK OF AMERICA AND CITIGROUP LEAD TO HYBRID RATING REVIEW AND COULD TEMPER DEBT AND DEPOSIT RATINGS DOWNGRADES.
Moody's has affirmed the C- (C minus) standalone bank financial strength rating (BFSR) of each of Bank of America and Citigroup, and affirmed the C+ (C plus) BFSR of Wells Fargo. However, Moody's will consider whether there has been sufficient improvement in Bank of America's and Citigroup's financial strengths to warrant increasing their Baa2 Baseline Credit Assessments (BCAs) to Baa1. Consequently, certain of their hybrid securities were placed under review for possible upgrade. These ratings do not incorporate any systemic support uplift, so the review of their ratings will be focused on the assessment of these firms' standalone financial strength. In addition, to the extent that the BCAs are increased, this would temper the size of the potential downgrades to Bank of America's and Citigroup's debt and deposit ratings.
During its assessment of Bank of America's and Citigroup's BCAs, Moody's will evaluate each bank's progress in improving its risk profile. Each of these banks have increased their equity through internal capital generation, and most of their asset quality indicators have improved. In addition, the costs related to repurchasing mortgages sold to third parties due to breaches in representations and warranties have stabilized at relatively modest levels for Citigroup, though Bank of America continues to experience a high level of repurchase costs, but has entered into settlements with the GSEs and Assured Guaranty that reduce its potential exposure to higher losses under a stress scenario.
Despite this progress, these banks still have sizable residential mortgage exposures; their credit costs could therefore spike if the US economy were to contract again. Further, they continue to face litigation costs related to faulty foreclosure practices.
"Other considerations will include the potential effectiveness of changes in risk management at Bank of America and Citigroup, given their poor performance during the credit crisis and their still sizable capital market activities, which we view as both opaque and volatile," Jones says, "while ongoing capital plans will also be important in our assessment."