Following its promise issued less than two weeks ago, S&P downgraded the credit ratings of dozens of banks on Tuesday. This is following S&P’s announcement on Nov. 18 about a pending credit rating downgrade decision within the next three weeks.
Bank of America, Citigroup and Goldman Sachs Affected by S&P Downgrade
In S&P’s previous statement, the agency explained it would it would be taking steps to overhaul its methods for scoring the creditworthiness of about 750 banking groups, largely due to its scarred reputation following the U.S. credit rating downgrade in August. Among the banks that could be negatively affect by its overhaul were 37 of the world’s largest financial institutions.
Less than two weeks later, S&P issued its final decision and several major U.S. banks have suffered major consequences. According to the agency, the following banks have experienced credit rating downgrades cut as well as reduced outlooks:
- Bank of America: A to A- drop, negative outlook
- Citigroup: A to A- drop, negative outlook
- Goldman Sachs: A to A- drop, negative outlook
- Morgan Stanley: A to A- drop, negative outlook
- Wells Fargo: A+ to AA- drop, negative outlook
While JPMorgan Chase experienced a drop from A+ to A, it’s outlook was the only of the top banks to remain stable. Banks originating outside of the United States also suffered credit rating downgrades, including HSBC, Swiss bank UBS and London-based Barclays.
How S&P Determined Credit Rating Downgrades
In order to evaluate banks’ creditworthiness, S&P based its new ratings methodology on economic and industry risks, bank-specific strengths and weaknesses and the “likelihood of external government or group support.” No greater detail has been given regarding how the agency implemented downgrades and why it chose specific banks.
Some opponents of S&P’s downgrades– as well as Moody’s Investor Services’ downgrades of Bank of America, Wells Fargo and Citigroup in September– argue that while banks have not garnered the best reputations over the past few years, they have been in better shape than agencies give them credit for.
As noted by chief investment officer at Harris Private Bank, Jack Ablin, shared, “Banking is a business of confidence, and downgrades across the board like this are just another strike against them.”
While some question whether S&P credit rating downgrades are too severe, one fact standing is that major banking institutions will likely feel the bruise of the recent ratings downgrades.
