S&P Lowers Outlook on BofA and Citi - Analyst Blog

In view of concerns about the U.S. government’s keenness to further support key financial institutions in a way that benefits debt holders, Standard & Poor’s (S&P) Ratings Services on Tuesday cut its ratings outlooks on Bank of America Corporation (BAC) and Citigroup Inc. (C) to negative from stable.

According to a credit analyst of S&P, as the economy has started stabilizing, the U.S. government is seeking ways to reduce the systemic risk and potential vulnerability associated with major financial institutions.

Currently, both BofA and Citi carry counterparty credit ratings of “A” (sixth-highest investment grade). Also, S&P lowered Citi’s hybrid capital rating to BB-minus, three steps below investment grade, from B-plus. This improvement reflects a better capital position and progress in Citi’s stand-alone credit profile.

Though BofA maintained significant liquidity last year by improving its capital position, profitability was adversely impacted. According to S&P, BofA’s credit losses may remain at high levels for the remainder of 2010.

We expect Citi to incur higher credit losses in the upcoming quarters as its restructuring process continues. Moreover, the obscurity around the valuation of Citi Holdings will remain a drag on the shares in the near term.

With respect to BofA, the market turmoil was more harmful compared to its peers. However, BofA has concluded its biggest acquisitions. BofA acquired brokerage giant Merrill Lynch almost during the height of the financial crisis last year. It also acquired Countrywide Financial Corporation on July 1, 2008. The CEO views these deals as beneficial for stakeholders of the company. Furthermore, this will allow the bank to focus on rebuilding customer relationships.

Though BofA’s fourth quarter earnings benefited from the improvement in trading, investment and brokerage income, the company experienced continued net interest yield compression and mixed credit quality.