Bank downgrades likely will raise borrowing costs

Troubled banks near investment grade edge

Ratings agency Moody's downgraded 15 of the world's biggest banks last Thursday, lowering credit ratings by one to three notches to reflect the risk of losses they face from volatile capital markets activities. The cuts come at a time of tumult within the industry. Banks have struggled to improve their profits against the backdrop of the European sovereign debt crisis, a weak American economy and new regulations.

The lower ratings are likely to raise the companies' borrowing costs and affect how they raise capital, and could deprive some banks of trading revenue. The higher costs for banks could be passed on to customers such as municipalities, corporations and others who get loans from banks. Citigroup (C) and Bank of America (BAC), which have struggled to fully recover from the financial crisis, were among the hardest hit.

After the downgrades, those banks stand barely above the minimum for an investment grade rating. Executives at the banks argued that the new ratings failed to reflect the safeguards and changes that they had put in place in recent years. Morgan Stanley (MS) received a two-notch cut in its senior long-term debt rating, less than some market observers had expected. The credit rating agency also lowered its rating for Goldman Sachs (GS), and  JPMorgan Chase (JPM), which each saw a two-notch drop.

Other non-U.S. banks that were downgraded include Barclays (BCS), BNP Paribas (BNP),  Credit Agricole (ACA),  Credit Suisse (CS), Deutsche Bank (DB), HSBC (HBC), Royal Bank of Canada (RY), Royal Bank of Scotland (RBS), Societe Generale (GLE), and UBS (UBS). Credit Suisse suffered the biggest downgrade. Moody's chopped the bank's credit rating three levels, citing the Swiss bank's exposure to the global capital markets business, heavy wholesale funding requirements, and earnings volatility. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's Global Banking Managing Director Greg Bauer said in the announcement.

The iShares DJ Financial ETF (IYF) gapped lower Monday morning after a slight rebound on Friday from the steep drop on Moody's annoucnement Thursday.

iShares DJ Financial ETF (IYF : NYSE : US$54.09), Net Change: 0.52, % Change: 0.97%, Volume: 179,731

About the Author

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.

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