Rating agencies move quickly on Citigroup and Bank of America

Philip Bayley
Moody's Investor Service and Standard and Poor's were quick to move after Citigroup announced a US$12.1 billion fourth quarter loss and that it was splitting itself in two. Moody's placed its 'A1/P1' credit ratings on the holding company and 'Aa3' long term debt and deposit rating on the bank on review for possible downgrade and at the same time lowered the bank financial strength rating to 'C-' from 'C' and also left it on review for possible downgrade.

Moody's noted that the credit charges taken against investment banking portfolios and US consumer assets were within its recently increased expectations but sizable mark downs on its derivatives portfolio were not. Moody's review will focus on three issues: the potential for and possible implications of further systemic support; Citigroup's financial prospects; and the credit implications of Citigroup's strategic initiatives.

S&P affirmed its 'A/Stable/A-1' and 'A+/Stable/A-1' credit ratings assigned to the holding company and the bank. S&P noted it had lowered its ratings on the group on December 19 and was now placing a high degree of emphasis on future extraordinary government support for the group.

Similarly, S&P affirmed its recently lowered 'A+/Negative/A-1' ratings on Bank of America Corporation after it announced its fourth quarter results and a further US$24 billion capital injection from the US Treasury under the Troubled Asset Relief Program.

Moody's however, lowered its long-term debt rating on the holding company to 'A1' from 'Aa3' and its long-term bank deposit and bank financial strength ratings on Bank of America N.A. to 'Aa2' from 'Aa1' and to 'B-' from 'B', respectively.

Corresponding downgrades were made to the ratings assigned to Merrill Lynch & Co. The outlook on all ratings is negative.    

Moody's responded to the disclosure of substantial losses at Merrill Lynch for the fourth quarter of 2008, and in light of the magnitude of those losses has concerns that the risk management challenges at Merrill Lynch extend beyond the pool of assets on which Bank of America is receiving government protection.

Fitch Ratings downgraded the long-term issuer default rating assigned to Bank of America N.A. to 'A+' from 'AA-' but affirmed the long-term issuer default ratings of 'A+' assigned to Bank of America Corporation and Merrill Lynch & Co. The outlook on all issuer default ratings is stable.

Fitch also lowered the individual ratings on all Bank of America Corporation entities to 'C' from 'B' and placed the ratings on Rating Watch Negative. Fitch said that the combined Bank of America/Merrill Lynch franchise is likely to experience ongoing operating and asset quality pressures in the current severe recessionary environment but noted that government support has been forthcoming and additional support will likely be provided in the future, if necessary.

Following Deutsche Bank's unexpectedly large €4.8 billion fourth quarter loss, Fitch placed the 'AA-/F1+' issuer default ratings assigned to the bank on Rating Watch Negative. It also lowered the individual rating to 'B/C' from 'B'.

Fitch has concerns about Deutsche Bank's underlying profitability, which is strongly influenced by its corporate and investment banking operations, when the outlook for this business segment in its main markets remains depressed. Fitch is also closely monitoring the bank's vulnerability to market volatility and asset devaluation and its success in reducing the leverage of its balance sheet.

S&P affirmed the 'A+/Stable/A-1' ratings (lowered December 19) it assigns to Deutsche Bank, noting that the larger than expected fourth quarter loss was mainly attributable to substantial deleveraging and reduction in trading books during a period of extreme volatility, correlation and basis risk in capital markets.

Moody's lowered its senior debt ratings on JPMorgan Chase & Co. and JPMorgan Bank N.A. to 'Aa3' from 'Aa2', and 'Aa1 from 'Aaa', respectively and the bank financial strength rating was lowered to 'B' from 'B+'. The outlook on all ratings is stable.

Moody's took the view that consecutive quarterly losses over the next year cannot be ruled out as JPMorgan Chase & Co. faces four broad challenges: the prospect of revenue declines due to a slower economy; the need to continue to mark down its inventory of investment banking assets; the need for higher charges against its $302 billion residential-mortgage portfolio; and the likelihood of increased credit costs against its $185 billion credit-card portfolio.

SNS Bank N.V., which still has A$925 million of bonds on issue in the domestic market, was also downgraded by Moody's to 'A2' from 'A1' for its senior debt and bank deposits and its bank financial strength rating was lowered to 'C' from 'C+'. The outlook on all ratings was changed to negative from stable.

Asset quality and therefore profitability is expected to deteriorate given the bank's significant real estate exposures. SNS Bank is primarily a mortgage lender in the Netherlands with structurally low profitability. Higher funding costs will be a drag on earnings.   

S&P lowered its ratings on Lloyds TSB Group Plc to 'A+/A-1' from 'AA-/A-1+' and lowered the long-term rating assigned to Lloyds TSB Bank Plc to 'AA-' from 'AA'. All ratings were removed from the CreditWatch initiated in September.

The rating action anticipated the completion of the acquisition of HBOS Plc last week, and reflects the weaker financial profile of the holding company and the bank that will result.

The 'A+/A-1' and 'AA-/A-1+' credit ratings assigned to HBOS Plc and Bank of Scotland Plc were affirmed and removed from the CreditWatch initiated in October.

The rating outlook on all entities is negative, reflecting the risk that the poor economic environment in the UK could generate loan losses significantly beyond expectations.

Fitch also lowered its long-term issuer default ratings on Lloyds TSB Group Plc and Lloyds TSB Bank Plc to 'AA-' from 'AA+' and lowered the same ratings on HBOS Plc and Bank of Scotland Plc to 'AA-' from 'AA', removed all ratings from Rating Watch Negative and assigned a stable outlook.

Fitch said the rating actions reflect the potential implications for the enlarged group's credit profile of owning lower-rated HBOS and the significant challenges the group faces in integrating the significantly larger HBOS group during a period of extraordinary financial market turbulence. The actions also reflect the continued deterioration in the enlarged group's main operating environment over recent months and expected continuing pressure on earnings and asset quality as the UK economy weakens.

The outlook on the 'Baa2' rating assigned by Moody's to the senior secured bank debt and A$880 million of credit wrapped bonds issued by BBI (DBCT) Finance Pty Ltd was revised to negative from stable. The BBI (DBCT) Group, of which BBI (DBCT) Finance Pty Ltd is the financing arm, faces increasing counterparty risk in the challenging operating environment for coking and energy coal at a time when it is expanding the Dalrymple Bay Coal Terminal.

In addition, the credit profile of parent company, Babcock & Brown Infrastructure ('B1' corporate family rating, on review with direction uncertain) has weakened recently.

Seiza Augustus Series 2007-1 Trust was again the subject of rating action but last week it was S&P that affirmed the ratings assigned to four tranches and lowered ratings on three others. Moreover, the rating action by S&P was in response to the continuing deterioration in the performance of the underlying portfolio of residential and small-ticket commercial property loans, rather than management changes.

To date, there have been significant charge-offs to the unrated Class G notes, weakening the credit support available to the Class D, E, and F notes. The ratings on these were lowered to 'BB' from 'BBB/Watch Neg', 'CCC+' from 'B/Watch Neg' and 'CCC-' from 'CCC/Watch Neg', respectively.

The ratings on the Class A, B, C and M notes were affirmed at 'AAA', 'AA', 'A' and 'A', respectively. These tranches benefit from the increased credit enhancement that comes from the sequential pay structure of the transaction.