Moody’s Downgrades Three US Banking Giants

By Frank Yu
Frank Yu
Frank Yu
September 21, 2011 Updated: October 1, 2015
Wells Fargo & Co. and Bank of America Corp. were downgraded in long-term credit ratings as well as the short-term credit rating of Citigroup Inc. on Wednesday by rating agency Moody's Investors Service. All three banks are among the top five U.S. banks measured by assets. (Justin Sullivan/Getty Images)
Wells Fargo & Co. and Bank of America Corp. were downgraded in long-term credit ratings as well as the short-term credit rating of Citigroup Inc. on Wednesday by rating agency Moody's Investors Service. All three banks are among the top five U.S. banks measured by assets. (Justin Sullivan/Getty Images)

NEW YORK—Three of the largest U.S. banking firms suffered ratings cuts on Wednesday, underscoring a deepening lack of confidence in the nation’s financial industry.

Rating agency Moody’s Investors Service downgraded the long-term credit ratings of Wells Fargo & Co. and Bank of America Corp., as well as the short-term credit rating of Citigroup Inc. on Wednesday. All three banks are among the top five U.S. banks measured by assets.

Bank of America suffered a two-level rating cut, from A2 to Baa1, while Wells Fargo was downgraded one notch from A2 to A1. Citigroup’s short-term rating was cut from Prime 1 to Prime 2.

Moody’s rationale for its ratings cuts lies in the fact that the U.S. government, faced with high unemployment and debt issues, is unlikely to provide unconditional support to the banking sector should banks fail.

“Moody’s believes that the government is likely to continue to provide some level of support to systemically important financial institutions,” Moody’s said in its report on Wednesday detailing its rating cut for Bank of America and Wells. “However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute.”

Large banks received billions of short-term funding during the financial crisis—part of the TARP program—but recent legislations including the Dodd-Frank Act will make it harder in the future for banks to receive bailouts from the federal government. Moody’s rating cuts Wednesday reflect those sentiments.

But Moody’s iterated that the ratings move does not reflect any weakness in Bank of America’s intrinsic creditworthiness, but a reflection of the changing market environment. In a statement, Bank of America disagreed with Moody’s assertions, and said that even Moody’s “states clearly that we have made significant progress.”

Bank of America is currently facing a litany of lawsuits involving its legacy residential mortgage business, and this month announced a massive cost-cutting program including the elimination of up to 30,000 jobs.

Shares of all three banks dropped in light of the news Wednesday. Bank of America (NYSE: BAC) declined 7.5 percent to settle at $6.38 on the New York Stock Exchange. Citigroup (NYSE: C) fell by 5.2 percent, and shares of Wells (NYSE: WFC) were lower by 3.9 percent.

Year-to-date, financial shares on the S&P 500 have decreased 17.9 percent as a whole.

Frank Yu