Fitch Ratings has placed the ratings of a number of major banks under review for possible downgrade following a new rule proposed by the U.S. Federal Deposit Insurance Corporation (FDIC). Recently, the board of directors of FDIC has voted to approve the rule that details the way it would recognize the “systemically important” banks and financial companies under the new Dodd-Frank financial reform law.
Though the ratings of a number of banks and bank holding companies are placed under review for a possible downgrade, the credit ratings of Bank of America Corp.(BAC) and Citigroup Inc. (C) are the most threatened as a result of the significant support the companies received from the government. Both these companies received $45 billion in tax-payer funds from the government during the financial crisis. That support gave them a three-notch increase to their long-term A+ issuer default ratings.
A part of the new rule seems to separate senior creditors’ claims by their maturity dates and purpose, which is one of the prime concerns for Fitch. However, the proposed rules need to consider the public comment period prior to its implementation.
According to Fitch, the support ratings may also be lowered for companies or subsidiaries of some of the other biggies such as JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), US Bancorp (USB), Fifth Third Bancorp (FITB), Comerica Inc. (CMA), SunTrust Banks Inc. (STI) and KeyCorp (KEY).
Also, the support ratings of a number of other banks were placed on Ratings Watch Negative. These banks include Regions Bank whose parent company is Regions Financial Corp. (RF), The Bank of New York Mellon Corp.’s (BK) banking unit, State Street Bank of State Street Corp. (STT), PNC Bank N.A. of PNC Financial Services Group Inc. (PNC) and BB&T Corp. (BBT).
However, both BofA and Citi have reported impressive third quarter 2010 results and benefited from an improvement in the credit quality. BofAreported third quarter 2010 earnings of 27 cents per share, substantially ahead of the Zacks Consensus Estimate of 16 cents. Citi, on the other hand, reported earnings of 8 cents per share, ahead of the Zacks Consensus Estimate of 5 cents.
The market turmoil impacted BofA and Citi more than their peers and both companies incurred significant losses during the financial crisis. However, they have bounced back to profitability during the first quarter of 2010. Though we are encouraged to see better-than-expected second and third quarter results in a sluggish economic recovery, we believe that a rating downgrade will dampen investors’ faith in the stocks in the near term. Additionally, a rating downgrade also results in an increase in the cost of borrowing money. Hence, as of now, we keep a watch on the companies.
Both BofA and Citi stock maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Also, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
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