Moody’s Investors Service recently downgraded its rating outlook to negative from stable for Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. However, despite this news, the stocks of these banks saw a rally on Tuesday due to favorable inflation data.
In a research note published by Moody’s analyst Peter E. Nerby on Monday, he stated that these rating downgrades are a reflection of the potentially weaker capacity of the US government to support its systemically important banks.
Despite the downgrade, Moody’s maintained its "Strong +" score for the macro profile of the US banking system. This downgrade aligns with Moody’s previous rating cut on Friday for US sovereign debt.
However, Moody’s did not change its stable rating on the debt of Citigroup Inc.
Following the favorable consumer-price-index reading that boosted financial markets, Bank of America's stock rose by 5.1%, while JPMorgan Chase saw a 1.8% increase, Wells Fargo gained 3%, and Citigroup rose by 4.1%.
According to Nerby, a potential upgrade for Bank of America would be based on its ability to sustain strong and stable performance, with consistently stronger profit and capital levels compared to its peers. Additionally, it would require maintaining a conservative risk profile, demonstrating a "superior" track record of risk control, consistent management, and a "strong" liquidity and funding profile.
Citigroup could potentially experience upward rating pressure if the ongoing corporate transformation led by Chief Executive Jane Fraser is successful.
Moody's Evaluates Citigroup, JPMorgan Chase, and Wells Fargo
Moody's, a renowned credit rating agency, has provided its assessment of three major banks: Citigroup, JPMorgan Chase, and Wells Fargo. In their evaluation, Moody's considers various factors to determine the creditworthiness of these financial institutions.
Citigroup: Prioritizing Regulatory Compliance
Moody's will closely examine Citigroup's progress in lifting regulatory consent orders. Additionally, the agency will assess the effectiveness of Citigroup's internal control and risk management framework. Citigroup's ability to avoid risk-management failures, which could impact its counterparts in the industry, will be a crucial consideration. Moody's also emphasizes the importance of Citigroup maintaining a restrained risk appetite and improving operating leverage.
JPMorgan Chase: Significant Creditor Risks
Moody's highlights JPMorgan Chase's "complex" capital-markets business as a potential source of substantial creditor risks. To achieve an upgrade in JPMorgan Chase's baseline credit assessment, the bank must consistently demonstrate strong and stable performance and capital levels that surpass its peers. An upgrade in the baseline credit assessment would likely lead to an upgrade in JPMorgan Chase's debt ratings, according to Moody's.
Wells Fargo: A Debt with High Ratings
Wells Fargo currently holds highly rated debt, with no imminent upward price pressure expected in the next 12 to 18 months, according to Moody's. However, the agency does outline specific scenarios that could result in a downgrade of Wells Fargo's credit rating. These include a loss of traction in resolving legacy regulatory issues, a material deterioration in its deposit franchise, a significant increase in nonperforming assets, or a substantial expansion into riskier activities compared to its other banking operations. Moody's also notes that major litigation or operational-risk changes could impact Wells Fargo's ratings.
While Moody's assessment provides valuable insights into these banks, it is crucial for investors and stakeholders to closely monitor any updates and changes in their credit ratings.
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