New York, January 27, 2021 -- Moody's Investors Service (Moody's) has upgraded the senior
unsecured debt and issuer ratings of The Goldman Sachs Group, Inc.
(Goldman Sachs) to A2 from A3 and of Morgan Stanley to A1 from A2 as well
as the senior unsecured debt ratings of their respective guaranteed subsidiary
obligations, including those of GS Finance Corp. (GSFC,
to A2 from A3) and Morgan Stanley Finance LLC (MSFL, to A1 from
A2). At the same time the rating agency also upgraded to Prime-1
from Prime-2 the short-term ratings of Goldman Sachs and
the short-term ratings on subsidiary obligations guaranteed by
Goldman Sachs.
With this rating action, the outlooks for Goldman Sachs and Morgan
Stanley (and for GSFC and MSFL) have changed to stable from rating under
review. Moody's said the other ratings and assessments for Goldman
Sachs and Morgan Stanley and their rated subsidiaries are unaffected by
today's rating action. A complete list of affected ratings and
entities can be found at the end of this press release.
RATINGS RATIONALE
Moody's said the action follows the rating agency's decision to
revise the asset loss rate assumption it uses as a part of its Advanced
Loss-Given-Failure (LGF) analysis when assessing the magnitude
of loss that would accrue to Goldman Sachs's or Morgan Stanley's
creditors upon either firm's failure. The rating agency believes
the ongoing shift in both firms' business mix will continue,
which together with enhancements made to resolution planning and processes
since the financial crisis and significant improvements to the resilience
and transparency of the capital markets infrastructure increase the likelihood
of a more orderly resolution in the event of either firm's failure,
as well as greater preservation of the firm's remaining franchise
value than Moody's had previously assumed. As a result,
the rating agency has lowered its at-failure asset loss rate assumption
for both firms to 8% from 13%, bringing this assumption
in line with that already used for the firms' global peers.
Moody's said Morgan Stanley's recently completed acquisition of
E*TRADE Financial, LLC (E*TRADE, A3 stable) and its
announced agreement to acquire Eaton Vance Corp. (Eaton Vance,
A3 stable) will further shift Morgan Stanley's business mix toward
wealth and investment management activities. Moody's expects
these activities to generate profitable sources of generally more stable
revenue than Morgan Stanley's capital markets business. The
acquisitions will accelerate strategic developments that have already
been underway for a number of years, during which time Morgan Stanley
has made steady, deliberative progress in developing its wealth
and investment management businesses and positioning them for organic
and acquisition-based growth.
Similarly, Moody's noted that Goldman Sachs has identified
four strategic growth initiatives focused on expanding its earnings in
consumer banking, wealth management, corporate transaction
services, and third party asset management. Moody's expects
that these businesses will generate more stable and recurring revenues
than Goldman Sachs's capital markets and principal investing activities.
These initiatives build on earlier developments at the firm to expand
beyond the firm's core capital markets and principal investing activities,
including through the acquisition of GE's consumer deposit platform,
the launch of the firm's Marcus consumer lending business,
and the acquisition of investment advisory firm United Capital.
The firm has already reported some initial success with these initiatives,
most notably but not exclusively with the substantial growth in its deposit
base.
Moody's has concluded that the strategic initiatives at each firm
will continue to reduce their concentration in capital markets activities.
As such, a greater proportion of the earnings at each firm will
be derived from more stable and recurring revenues which in the event
of either firm's failure are more likely to still retain some value
that would accrue to the firm's creditors. In addition,
the rating agency believes there have been significant improvements to
the resilience and transparency of the capital markets infrastructure,
which should help reduce client defections at failure and also help mitigate
creditor losses. In particular, the expansion of central
clearing and agreements in relation to derivatives contracts "stay" protocols
will provide for temporary contractual stays on the exercise of default
rights by counterparties to a failed institution, reducing but not
eliminating the risk of disorderly unwinds and value-destroying
fire sales.
Finally, the rating agency noted that over the past five years there
have been substantial enhancements made to resolution planning and processes
at the largest US banks, including Goldman Sachs and Morgan Stanley,
based on detailed guidance and oversight by the Federal Reserve and the
FDIC. These plans include comprehensive measurements and ongoing
monitoring of the amount of liquidity and contingent capital needed to
execute a successful resolution not only at a group level but at each
material subsidiary, including the amount of liquidity needed to
ensure the retention of key employees during a resolution in order to
limit the adverse impact of employee attrition.
The resolution plans also include numerous early warning triggers and
runways during which additional actions would be mandated to either recover
or implement a resolution, and highly detailed playbooks which contemplate
a wide variety of contingencies that might be encountered and actions
that might need to be taken during resolution. Moody's believes
this comprehensive resolution planning and the embedding of related processes
should help mitigate creditor losses in the event one of these firms should
fail, and in this regard, the resolution plans for Morgan
Stanley and Goldman Sachs are subject to the same oversight and scrutiny
as that of their largest US peers, for whom Moody's already
assumes an 8% at-failure loss rate.
Under Moody's LGF analysis, the adoption of an 8% loss
rate assumption results in a one notch upgrade to the holding company
senior unsecured debt ratings at both Morgan Stanley and Goldman Sachs,
as well as at similarly rated guaranteed subsidiary obligations.
This reflects the improved measure of asset recovery values at failure
that would accrue to this class of creditors. At each firm,
the holding company senior unsecured debt ratings are now two notches
above the Adjusted Baseline Credit Assessment (BCA) assigned to each firm's
principal banking subsidiary (a3 at Morgan Stanley Bank, N.A.
(MSBNA) and baa1 at Goldman Sachs Bank USA). This is at least one
more notch of uplift than is the case at the firm's closest US bank
holding company peers due to the significantly greater proportion of holding
company debt outstanding at Goldman Sachs and Morgan Stanley, which
Moody's believes would provide more loss absorption for holding
company senior creditors than is the case at those peers.
In this regard, the rating agency has also assessed Goldman Sachs's
and Morgan Stanley's expected funding profile, and has concluded
that even though both firms are likely to continue growing deposit funding,
they will also continue to have a substantial need to fund assets that
cannot be funded with deposits at their bank subsidiaries under US banking
regulations. Moody's therefore expects that even if there
is some gradual reduction in the amount of holding company debt outstanding,
over the medium term the amount of holding company debt outstanding will
continue to support two notches of uplift from the adjusted BCA for the
ratings of each firm's parent holding company senior unsecured obligations.
Moody's noted that while the improved measure of asset recovery values
at failure would also accrue to creditors at the operating subsidiaries
of Morgan Stanley and Goldman Sachs, the ratings and assessments
at those subsidiaries are unaffected by the changed loss rate assumption
since those ratings and assessments are already at the maximum three notches
above the Adjusted BCA. In addition, the ratings for the
more junior holding company instruments at each firm are also unaffected
since the amount of such debt outstanding is relatively modest compared
to the substantial amount of holding company senior debt and as such insufficient
to provide any ratings uplift from the Adjusted BCA even under the 8%
loss rate assumption.
The upgrade of the short-term ratings of Goldman Sachs and the
short-term ratings on subsidiary obligations guaranteed by Goldman
Sachs to Prime-1 from Prime-2 was driven by the upgrade
of the long-term senior debt rating to A2 and reflects Moody's
standard linkage between its long-term and short-term rating
scales.
The rating outlook for Goldman Sachs is stable, reflecting Moody's
expectation that the amount of holding company debt outstanding over the
medium term will continue to support two notches of uplift from the adjusted
BCA of Goldman Sachs Bank USA and that the group will continue to report
solid profitability and capital ratios above those of most of its peers
and will maintain its improved funding profile, while its robust
risk management and controls framework and strong client relationships
will allow the firm to continue to generate lower earnings volatility
than at many of its peers.
Morgan Stanley and its rated subsidiaries' stable outlooks reflect Moody's
expectation that Morgan Stanley will retain a strong liquidity profile,
maintain its improved funding profile, may suffer a temporary dip
in profitability during the remainder of the coronavirus crisis,
and will over time return increasing amounts of capital and moderately
reduce its regulatory capital ratios once the current temporary regulatory
restrictions on capital payouts for the largest US banks are lifted.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Goldman Sachs's ratings could be upgraded if the firm's tangible
common equity ratio were likely to remain above 14% of advanced
approaches risk-weighted assets, its reliance on market funds
were to fall below 40% of tangible banking assets, and its
net income were to exceed 1% of tangible assets, all on a
sustainable basis. The ratings could also be upgraded if the firm's
strategic initiatives succeed in enhancing its earnings stability and
significantly and sustainably increasing its earnings diversification.
Goldman Sachs's ratings could be downgraded if the firm's tangible common
equity ratio declines below 12% or net income/tangible assets declines
below 0.5% if the firm is unlikely to be able restore either
over the near-term. The ratings could also be downgraded
if there is a significant increase in the firm's earnings volatility,
if the firm suffers from a significant loss of clients or a material erosion
of capital due to reputational or legal concerns, or if there are
any indications of control or risk management failures, a marked
increase in risk appetite, or any deterioration in the firm's liquidity
profile. In addition, the parent holding company A2 senior
unsecured debt and issuer ratings could be downgraded should Moody's conclude
that a significant decline in holding company debt outstanding is likely
over the medium term.
Morgan Stanley's and its rated subsidiaries' long-term ratings
could be upgraded should there be an improvement in MSBNA's BCA and an
upgrade of support-provider Mitsubishi UFJ Financial Group,
Inc. (MUFG, A1 senior with stable outlook, a3 BCA at
MUFG Bank, Ltd.). MSBNA's BCA could be improved should
Morgan Stanley drive and sustain a fundamental shift in business mix towards
recurring revenue streams with a continued trend of improved and more
stable profitability, accompanied by the maintenance of robust capital
and liquidity.
An improvement in MSBNA's BCA without an improvement in the creditworthiness
of MUFG is less likely to result in Morgan Stanley's ratings being upgraded.
Were MSBNA's BCA to be upgraded by one notch, its BCA would be at
the same level as MUFG's lead bank's BCA, at which point it would
be unlikely that Morgan Stanley's ratings would continue to benefit from
a notch of affiliate support under Moody's joint default analysis,
and accordingly MSBNA's Adjusted BCA would remain unchanged.
Morgan Stanley's ratings could be downgraded if prolonged weakening
of results, a significant deterioration in loan credit quality or
loan underwriting standards, an increase in portfolio concentrations,
a deterioration in the firm's liquidity profile, a general increase
in risk appetite, or if there are any indications of control or
risk management failures. Also, Morgan Stanley's ratings
would likely be downgraded should support-provider MUFG be downgraded,
or should there be a weakening in Morgan Stanley's and MUFG's operational
and strategic relationship.
LIST OF AFFECTED RATINGS
Upgrades, Previously placed on Review for Upgrade:
..Issuer: The Goldman Sachs Group, Inc.
....Senior Unsecured Bond (Local Currency),
Upgraded to A2 from A3, Stable from Ratings Under Review
....Senior Unsecured Bond (Foreign Currency),
Upgraded to A2 from A3, Stable from Ratings Under Review
....Commercial Paper, Upgraded to P-1
from P-2
....LT Issuer Rating, Upgraded to A2
from A3, Stable from Ratings Under Review
....Senior Unsecured Medium-Term Note
Program (Local Currency), Upgraded to (P)A2 from (P)A3
....Senior Unsecured Medium-Term Note
Program (Foreign Currency), Upgraded to (P)A2 from (P)A3
....Other Short Term (Local Currency),
Upgraded to (P)P-1 from (P)P-2
....Other Short Term (Foreign Currency),
Upgraded to (P)P-1 from (P)P-2
....Senior Unsecured Shelf, Upgraded
to (P)A2 from (P)A3
..Issuer: GS Finance Corp.
....Backed Senior Unsecured Medium-Term
Note Program, Upgraded to (P)A2 from (P)A3
....Backed Senior Unsecured Bond (Local Currency),
Upgraded to A2 from A3, Stable from Ratings Under Review
....Backed Senior Unsecured Bond (Foreign
Currency), Upgraded to A2 from A3, Stable from Ratings Under
Review
....Backed Senior Unsecured Shelf, Upgraded
to (P)A2 from (P)A3
..Issuer: Asset Funding Company IV Limited
....Backed Senior Secured Medium-Term
Note Program (Foreign Currency), Upgraded to (P)A2 from (P)A3
....Backed Other Short Term (Foreign Currency),
Upgraded to (P)P-1 from (P)P-2
..Issuer: Goldman Sachs Canada Finance Co.
....Backed Commercial Paper, Upgraded
to P-1 from P-2
..Issuer: Goldman Sachs Financial Products I Limited
....Backed Senior Unsecured Medium-Term
Note Program (Foreign Currency), Upgraded to (P)A2 from (P)A3
..Issuer: Goldman Sachs Japan Co., Ltd.
....Backed Commercial Paper, Upgraded
to P-1 from P-2
..Issuer: Morgan Stanley
....Senior Unsecured Bond (Local Currency),
Upgraded to A1 from A2, Stable from Ratings Under Review
....Senior Unsecured Bond (Foreign Currency),
Upgraded to A1 from A2, Stable from Ratings Under Review
....LT Issuer Rating, Upgraded to A1
from A2, Stable from Ratings Under Review
....Senior Unsecured Medium-Term Note
Program (Local Currency), Upgraded to (P)A1 from (P)A2
....Senior Unsecured Medium-Term Note
Program (Foreign Currency), Upgraded to (P)A1 from (P)A2
....Senior Unsecured Shelf, Upgraded
to (P)A1 from (P)A2
..Issuer: Morgan Stanley Finance LLC
....Backed LT Issuer Rating, Upgraded
to A1 from A2, Stable from Ratings Under Review
....Backed Senior Unsecured Medium-Term
Note Program, Upgraded to (P)A1 from (P)A2
....Backed Senior Unsecured Bond (Local Currency),
Upgraded to A1 from A2, Stable from Ratings Under Review
....Backed Senior Unsecured Bond (Foreign
Currency), Upgraded to A1 from A2, Stable from Ratings Under
Review
....Backed Senior Unsecured Shelf, Upgraded
to (P)A1 from (P)A2
Outlook Actions:
..Issuer: The Goldman Sachs Group, Inc.
....Outlook, Changed To Stable From
Ratings Under Review
..Issuer: GS Finance Corp.
....Outlook, Changed To Stable From
Ratings Under Review
..Issuer: Asset Funding Company IV Limited
....Outlook, Changed To No Outlook From
Ratings Under Review
..Issuer: Goldman Sachs Canada Finance Co.
....Outlook, Changed To No Outlook From
Ratings Under Review
..Issuer: Goldman Sachs Financial Products I Limited
....Outlook, Changed To No Outlook From
Ratings Under Review
..Issuer: Goldman Sachs Japan Co., Ltd.
....Outlook, Changed To No Outlook From
Ratings Under Review
..Issuer: Morgan Stanley
....Outlook, Changed To Stable From
Ratings Under Review
..Issuer: Morgan Stanley Finance LLC
....Outlook, Changed To Stable From
Ratings Under Review
The principal methodology used in these ratings was Banks Methodology
published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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 ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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 rating analyst and the Moody's legal entity that has issued
the ratings.
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.
David Fanger
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Donald Robertson
Senior Vice President
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
