Having watched the credit markets grow more and more weary of the major US financials, it should not be total surprise that ratings agency S&P just put all the majors on watch for a rating downgrade:
- *JPMORGAN, BANK OF AMERICA, WELLS FARGO, CITIGROUP, GOLDMAN SACHS, STATE STREET CORP, MORGAN STANLEY MAY BE CUT BY S&P
Despite all the talking heads' proclamations on higher rates and net interest margins and 'strongest balance sheets' ever, S&P obviously sees something more worrisome looming. S&P blames The Fed's new resolution regime for its shift, implying "extraordinary support" no longer factored in. This comes just hours after Moody's put Bank of Nova Scotia on review also (blaming the move on concerns over increased risk appetite).
The ratings agency cited significant measures taken by Canada's third-largest bank to increase its profitability over the past couple of years, which signal a "fundamental shift" in the bank's risk appetite.
Over the past two years, Scotia has accelerated the growth in its credit card and auto finance portfolios "both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios," Moody's said in a note late Monday.
While the bank's moves are aimed at increasing profitability to counter the lowest domestic net interest margins among Canada's six largest banks, Moody's believes they increase the prospect of future credit losses when the credit cycle turns.
Goldman, Morgan Stanley & Citigroup rated A- with negative outlook, JPM has A rating with negative outlook, State Street rated A+ with negative outlook, according to Bloomberg data
Who could have seen that coming?
As Bloomberg noted earlier, The Fed's new proposal for a "final firewall" requiring total loss absorbing capacity (TLAC) buffers at the largest banks may be the driver of S&P's decision...
U.S. banks may collectively need to add $90 billion in debt by Jan. 1, 2022, to help ensure an orderly wind down in case of failure, which may add $680 million to $1.5 billion in annual costs. Eight G-SIBs would hold a minimum of long-term debt (LTD) under the Fed's Oct. 30 TLAC proposal. LTD is meant to address "too-big-to-fail" concerns by having a known quantity of capital to help a bank transition through resolution. The Fed reasons that LTD could be used as a fresh source of capital, unlike existing equity.
Companies Impacted: Using 4Q14 figures, the Fed estimates six U.S. G-SIBs collectively face a $120 billion TLAC and LTD shortfall. LTD stand-alone shortfall is approximate $90 billion. Among the eight G-SIBs are JP Morgan, Citigroup, Bank of America, Wells Fargo, Morgan Stanley, State Street and Bank of New York.
All of which have seen risk-weighted assets surge since 2008...
Just as we suspected, S&P's decision is based on The Fed's new regime:
- *S&P CITES FED'S NOTICE OF RULEMAKING FOR ACTIONS ON EIGHT GSIBS
- *S&P REVIEWS RESOLUTION REGIME FOR U.S. BANKS
- *S&P SEES EXTRAORDINARY SUPPORT NO LONGER FACTORED IN GSIB RTGS
- *S&P EXPECT TO RESOLVE CREDITWATCH ON GSIBS BY EARLY DEC.
In other words right before The Fed's rate hike decision.