Zacks_Analysts' Blog : Rating Outlook Falls for Big Banks - Analyst Blog

The rating outlooks for big banks have been lowered by Moody’s Investor Service, a part of Moody’s Corporation (MCO). The rating agency has tempered its outlook for Bank of America Corporation (BAC) (or BofA) , Citigroup Inc. (C) and Wells Fargo & Company (WFC) to “negative" from “stable".

The downgrade comes as a result of a new law – Dodd-Frank Wall Street Reform and Consumer Protection Act – that is anticipated to reduce government support for the U.S. banks in future. This law also fortifies regulators’ supervising power, including power to liquidate a bank, if required.

According to the rating agency, these banks have received extra ordinary support from the government during the recent financial crisis. The handholding helped these companies to enjoy debt and deposit ratings well above the appropriate ratings based on their basic financial strength and without government aid.

Nevertheless, the long-term and short-term ratings of these banks were affirmed. The rating agency believes that the impact of the new law will take time to be fully understood. Additionally, the law would face significant challenges in resolving issues with the global companies that are interconnected and any steps in liquidating those banks or any stringent control would not be possible without an economic disorder. Hence, the current ratings will continue.

The rating agency already has negative rating outlook on The Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and State Street Corp. (STT).

For similar reasons, the rating agency has also placed 10 regional banks for a possible downgrade. These banks include BB&T Corp. (BBT), Capital One Financial Corp. (COF), Fifth Third Bancorp (FITB), KeyCorp (KEY), PNC Financial Services (PNC), Popular Inc. (BPOP), Regions Financial Corp. (RF), SunTrust Banks (STI), U.S. Bancorp (USB) and Zions Bancorp (ZION).

We believe that the rating outlook revisions will result in volatility in the stock prices in the near term.