What S&P Credit Downgrade of Banks Means

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Credit ratings agency Standard & Poor’s downgraded 15 banks based on changes to its methodology on Tuesday. Fortunately for consumers who are retail banking customers, the change will not affect everyday banking, says Jody Lurie, Janney Capital Markets’ corporate credit analyst.

“Overall this ratings change isn’t speaking to the banks themselves but banks adjusting for regulation and policy changes that have occurred over the past couple years,” she said.

The action was similar to competitor Moody’s downgrade of Bank of America, Citibank and Wells Fargo in August.

Lurie said banks’ liquidity seems to be “ok” although banks continue to remain under pressure with concern over the future of European sovereign debt and the U.S. economic outlook.

“I think in the long term this is more a drop in the bucket,” Lurie said.

Standard & Poor’s downgraded the largest U.S. banks, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley, Wells Fargo, JPMorgan Chase and Bank of New York Mellon, possibly affecting their short-term funding costs. Fifteen banks had ratings cuts, 20 were affirmed while two Chinese banks were upgraded.

S&P lowered Bank of America to A- from A with a negative outlook and decreased Wells Fargo to A+ from AA- while maintaining its outlook at negative. S&P maintained State Street Corp.’s  A+ rating, but changed its outlook to negative from stable.

“The banking industry continues to be under pressure and it’s a rocky road in the near term,” Lurie said.  “I think it will take more steps to reach a more stable position but they’ll eventually get there.”

Lurie said although S&P’s downgrade will stir up the investor community in the short-term, she expects long-tem sentiment toward the sector to remain “in a state of flux.” She said the action demonstrates that the banking sector is still in a period of transition, as new regulation, such as the Dodd-Frank Act’s financial regulatory reform, and events in Europe overshadow progress on asset quality.

Lurie said she was surprised that the markets reacted more negatively to Moody’s downgrade of three banks in August, also due to methodology, even after Moody’s warned in June it was considering doing so. Lurie points out that the financial markets may have been more volatile in August, when S&P downgraded U.S. sovereign debt.

Bank of America’s stock neared $5 a share yesterday afternoon, reaching $5.04, but on Wednesday it was $5.24 a share mid-day.  Shares of the other downgraded banks had also bounced back, boosted by a move by the Federal Reserve and European central banks early Wednesday to lower the cost of lending to European banks.

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