Ratings agency Moody's downgraded 15 of the world's biggest banks on Thursday, lowering credit ratings by one to three notches to reflect the risk of losses they face from volatile capital markets activities, but banks criticized the move as backward looking.
Morgan Stanley, one of the most closely watched firms in the much anticipated review, had its long-term debt rating lowered by just two notches, one level less than had been expected, sending its stock up sharply in after-hours trading.
The downgrade left Morgan Stanley more highly rated than Bank of America Corp and Citigroup, but a step below Goldman Sachs Group.
Credit Suisse, which last week was warned about weak capital levels by Switzerland's central bank, was the only bank in the group to suffer a three-notch downgrade. But its new A1 deposit and senior debt ratings still rank higher than many of its peers.
All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities, Moody's Global Banking Managing Director Greg Bauer said in the announcement.
Financial markets have been bracing for the downgrades since February, when Moody's Investors Service said it had launched a review of 17 banks with global capital markets operations. These companies faced diminished profitability and growth prospects due to difficult operating conditions, increased regulation and other factors, Moody's said.
The long-term debt ratings cuts could increase funding costs for Morgan Stanley and other banks, and trading partners may ask for more collateral. But the impact could be muted since the changes were in-line with indications given by Moody's on how much the ratings were likely to be cut.
The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for, said Mark Grant, managing director at Southwest Securities Inc. In fact, it was Morgan Stanley that was supposed to be downgraded by that amount and Morgan received only two notches of cuts.
David Mathers, Credit Suisse's chief financial officer, said the firm was pleased that Moody's continued to recognize it as one of the most highly rated banks in its peer group.
Besides Morgan Stanley, two other banks fared better than they could have. UBS could have been downgraded by three notches but was only bumped down two spots. HSBC could have fallen by two, but dropped only one notch.
BANKS CHALLENGE RATINGS
Other banks downgraded by two notches were: Barclays , BNP Paribas, Royal