New York, November 14, 2013 -- Moody's Investors Service has concluded its review of eight large US banking
groups. The credit ratings of these banking groups each benefit
from the agency's assumption of government support. Today's
rating actions reflect strengthened US bank resolution tools, prompted
by the Dodd-Frank Act, which affect Moody's assumptions
about US government support. Further, today's rating
actions consider the changing credit profiles of certain banks.
Moody's acted on the systemic support assumptions incorporated in
the ratings of the eight groups as follows: 1) did not change the
support assumptions for bank-level senior debt; 2) removed
all uplift from US government support in the ratings for bank holding
company debt; 3) reduced loss severity assumptions for bank holding
company debt; 4) reduced uplift for bank-level subordinated
debt. Moody's also aligned the support assumptions for certain
systemically important international subsidiaries with those of their
primary domestic affiliates.
Moody's lowered the standalone baseline credit assessments (BCA)
of Bank of New York Mellon and State Street Bank and Trust, both
to a1 from aa3 to reflect the long-term profitability challenges
facing these highly-rated custodian banks. The rating agency
also raised the standalone BCAs of both Bank of America N.A.
and Citibank N.A. to baa2 from baa3 to reflect positive
changes in the banks' credit profiles including declining legacy
exposures and strengthening capital.
Based on Moody's updated views on US government support and standalone
bank considerations, Moody's lowered by one notch the senior
holding company ratings of Morgan Stanley, Goldman Sachs,
JPMorgan, and Bank of New York Mellon. Moody's confirmed
the senior holding company ratings of Bank of America, Citigroup,
State Street, and Wells Fargo.
Following these actions, the rating outlooks are stable for all
eight bank holding companies and their main operating subsidiaries.
"We believe that US bank regulators have made substantive progress in
establishing a credible framework to resolve a large, failing bank,"
said Robert Young, Managing Director. "Rather than
relying on public funds to bail-out one of these institutions,
we expect that bank holding company creditors will be bailed-in
and thereby shoulder much of the burden to help recapitalize a failing
bank."
Moody's announced its review of bank ratings driven by systemic
support assumptions on August 22, 2013 https://www.moodys.com/research/Moodys-reviews-US-bank-holding-company-ratings-to-consider-reduced--PR_280779
and its review of the custodian banks on July 2, 2013 https://www.moodys.com/research/Moodys-places-BNY-Mellon-Northern-Trust-and-State-Street-on--PR_276281.
A further discussion of the rating drivers for each bank/debt type follows
the list of rating actions below. Moody's has also published
answers to frequently asked questions, available on its website
at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_160290
RATING ACTIONS (alphabetically)
The following are major entities and their primary debt classes:
Bank of American Corporation -- Long-term senior
unsecured debt confirmed at Baa2, subordinated debt confirmed at
Baa3, outlook stable; Short-term Prime-2 confirmed
Bank of America N.A. -- Long-term deposit
rating upgraded to A2 from A3, subordinated debt confirmed at Baa1,
outlook stable; Short-term to Prime-1 from Prime-2
The Bank of New York Mellon Corporation -- Long-term
senior unsecured debt downgraded to A1 from Aa3, subordinated debt
downgraded to A2 from A1, outlook stable; Short-term
Prime-1 affirmed
The Bank of New York Mellon -- Long-term deposit
rating downgraded to Aa2 from Aa1, subordinated debt downgraded
to Aa3 from Aa2, outlook stable; Short-term Prime-1
affirmed
Citigroup, Inc. -- Long-term senior
unsecured debt confirmed at Baa2, subordinated debt confirmed at
Baa3, outlook stable; Short-term Prime-2 confirmed
Citibank, N.A. -- Long-term deposit
rating upgraded to A2 from A3, outlook stable; Short-term
to Prime-1 from Prime-2
The Goldman Sachs Group, Inc. -- Long-term
senior unsecured debt downgraded to Baa1 from A3, subordinated debt
downgraded to Baa2 from Baa1, outlook stable; Short-term
Prime-2 affirmed
Goldman Sachs Bank USA -- Long-term deposit rating
affirmed at A2, outlook stable; Short-term Prime-1
affirmed
JP Morgan Chase & Co. -- Long-term senior
unsecured debt downgraded to A3 from A2, subordinated debt downgraded
to Baa1 from A3, outlook stable; Short-term to Prime-2
from Prime-1
JP Morgan Chase Bank NA -- Long-term deposit rating
affirmed at Aa3, subordinated debt downgraded to A2 from A1;
outlook stable; Short-term Prime-1 affirmed
Morgan Stanley -- Long-term senior unsecured debt
downgraded to Baa2 from Baa1, subordinated debt downgraded to Baa3
from Baa2, outlook stable; Short-term Prime-2
confirmed
Morgan Stanley Bank N.A. -- Long-term
deposit rating affirmed at A3, outlook stable; Short-term
Prime-2 affirmed
State Street Corporation -- Long-term senior unsecured
debt confirmed at A1, subordinated debt confirmed at A2, outlook
stable; Short-term Prime-1 affirmed
State Street Bank and Trust Company -- Long-term
deposit rating downgraded to Aa3 from Aa2, subordinated debt downgraded
to A1 from Aa3, outlook stable; Short-term Prime-1
affirmed
Wells Fargo & Company, Inc. -- Long-term
senior unsecured debt confirmed at A2, subordinated debt confirmed
at A3, outlook stable; Short-term Prime-1 confirmed
Wells Fargo Bank, N.A. -- Long-term
deposit rating affirmed at Aa3, subordinated debt confirmed at A1,
outlook stable; Short-term Prime-1 affirmed
Please click on the following link to access the full list of affected
credit ratings. This full list is an integral part of this press
release and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_160423
RATINGS RATIONALE -- BANK LEVEL SENIOR DEBT UNAFFECTED
The deposit and senior debt ratings at the bank level benefit from uplift
from their baseline credit assessments due to Moody's assumption
of a high or very high likelihood of support which remains unchanged.
As a result, the bank-level deposit and senior debt ratings
of these institutions are one to three notches higher than their standalone
credit assessments. Moody's view of support probabilities
for these firms remains unchanged because we believe the disorderly failure
of one of them would create the risk of contagion to the broader financial
system and the economy. What has changed is the source of this
financial support. With the single point of entry receivership
(SPE) framework more fully developed, Moody's believes that
if support were to be provided, it would be derived not from a bail-out
by the government, but, in most instances, from the
bail-in of holding company creditors. That is, a systemically
important bank would still likely be supported, but the FDIC would
largely shift the cost of supporting one of these firms from the public
sector to the private sector.
RATINGS RATIONALE -- LOWER SUPPORT ASSUMPTIONS AT HOLDING COMPANY
LEVEL, BUT LOSSES MITIGATED
As noted in August, the agency's review focused on two opposing
effects of the FDIC's SPE framework that influence risks for bondholders
at the bank holding company level. The first effect is the reduced
likelihood and predictability of systemic support. SPE is designed
to allow regulators to restore the solvency of a distressed entity without
using public funds. As envisioned by US regulators, the SPE
approach would impose losses on US bank holding company creditors to recapitalize
and preserve the operations of the group's systemically important
subsidiaries in a stress scenario. As a result, the holding
company creditors are unlikely to receive government support, signaling
a higher risk of default.
The second, opposing effect is the possible reduction in the severity
of losses for bank holding company creditors in the event of default ('loss
given default', or LGD). Under SPE, holding company
creditors will likely face lower losses than in a bankruptcy scenario,
for two reasons. First, Moody's expects that US regulators
will mandate a minimum level of loss-absorbing capital (equity
and debt) at the bank holding company. The larger the amount of
debt at the holding company at the point of distress, the lower
the LGD for holding company debt. Further, this resolution
framework is designed to maintain the systemically important subsidiaries
of the banking group as going concerns in order to mitigate systemic risk,
preserve franchise value and minimize losses. Therefore,
SPE may result in earlier intervention and a more orderly resolution,
which may in turn lead to higher recoveries compared with historical US
bank and thrift holding company defaults.
RATINGS RATIONALE -- BANK-LEVEL SUBORDINATED DEBT
Moody's reduced the uplift that had been incorporated into the subordinated
debt ratings of the eight banking groups' operating subsidiaries.
On the one hand, SPE is designed to keep systemically important
subsidiaries operating without causing a default on their obligations,
including on their subordinated debt. This reflects regulators'
objectives in employing SPE, which include mitigating systemic risk,
minimizing losses and maximizing the value of a systemically important
operating company's business. Support for the operating subsidiaries
would come primarily through the resources provided by the "bail-in"
of holding company creditors under SPE. However, if SPE failed
to ensure the ongoing viability of the operating subsidiaries, we
believe subordinated creditors at those subsidiaries would be unlikely
to benefit from any direct support the government might chose to provide
in order to meet the overarching objective of financial stability.
RATINGS RATIONALE -- SUPPORT ASSUMPTIONS FOR INTERNATIONAL SUBSIDIARIES
The priority under SPE of keeping systemically important subsidiaries
operating is the reason Moody's now incorporates support into the
ratings of certain international subsidiaries of the eight large US banking
groups. Under SPE, since these international subsidiaries
are highly integrated and key operating entities, the rating agency
believes that regulators would extend support through the SPE process
to preserve the value of the overall banking franchise and limit potential
contagion. Were support to not flow to these international subsidiaries,
that would also put at risk the international cooperation that is necessary
to facilitate a coordinated, orderly resolution of one of these
groups. Therefore, we expect that they would benefit from
a level of support similar to that of their key US affiliates.
RATINGS RATIONALE -- STANDALONE RATING ACTIONS
Bank of America
The upgrade of Bank of America's (BAC) baseline credit assessment
to baa2 from baa3 reflects the bank's improved capital position,
reduced tail risks, and declining expenses. The bank has
reached settlements on a variety of legal fronts, reducing the risk
of more severe litigation losses. While BAC remains exposed to
additional litigation risk, BAC's strengthened capital leaves
it better positioned to absorb related tail risks. In addition,
the risk of significant additional losses on the bank's mortgage
and home equity portfolio has declined as the portfolio has shrunk and
asset quality has improved. Finally, declining mortgage servicing
costs and ongoing efficiency initiatives are likely to improve profitability
over the next few years. Stronger, more consistent earnings
from BAC's core banking franchises should provide thicker shock
absorbers to protect creditors from the potential volatility and inherent
risk opacity of the bank's sizeable global capital markets business.
Citigroup
The upgrade of Citigroup's baseline credit assessment to baa2 from
baa3 reflects the bank's stronger balance sheet, improved
profitability and reduced earnings volatility. Further, capital
has been strengthened through earnings retention, while asset quality
metrics have improved through continuing run-off of the legacy
portfolio. Since 2009, Citigroup's earnings are becoming
somewhat less volatile, as the US economy has recovered and as the
firm has avoided costly risk control breakdowns. The rating agency
expects this track record to continue as the firm installs a more conservative
risk management culture and a more independent risk control function.
However, Citigroup remains reliant on global capital markets businesses
to generate satisfactory shareholder returns and will remain one of the
world's most complex banks. Therefore, future increases
in the standalone credit assessment are unlikely absent a material re-balancing
and simplification of the business mix.
Bank of New York Mellon & State Street
The downgrade of Bank of New York Mellon and State Street's baseline
credit assessments to a1 from aa3 reflects their profitability pressures.
Specifically, protracted low interest rates and the challenging
global operating environment have exposed vulnerabilities in the trust
and custody banks' business models and revealed the mispricing of
their largest custody relationships. Although both banks are engaged
in broad efficiency initiatives that will somewhat offset their profitability
pressures by leveraging technology, transforming core processes
and generally reducing expenses, the rating agency does not expect
an enduring competitive advantage to emerge for either of them.
This reflects the fact that much of the industry is engaged in similar
efficiency initiatives as well as the difficulty associated with re-pricing
the banks' largest custody relationships. In addition,
both firms face potential earnings volatility from litigation risk associated
with foreign exchange activities and securities lending, although
a number of individual cases have already been resolved.
Notwithstanding the downgrade, both banks enjoy comparatively high
baseline credit assessments based on their huge global custody and investment-servicing
franchises, where the barriers to entry are high and the secular
trends are favorable. They also have large, though less dominant,
asset-management businesses.
The principal methodology used in ratings of Citigroup Inc.,
Wells Fargo & Company, State Street Corporation, Bank
of America Corporation, and Bank of New York Mellon Corporation
(The) was Global Banks Methodology published in May 2013. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
The principal methodology used in ratings of Goldman Sachs Group,
Inc. was Global Securities Industry Methodology published in May
2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
The methodologies used in ratings of JPMorgan Chase & Co. and
Morgan Stanley were Global Banks Methodology published in May 2013,
and Global Securities Industry Methodology published in May 2013.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Peter E Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's concludes review of eight large US banks
