Bank of America Corp. was one of 15 large banks downgraded by Moodys Investors Service on Thursday, putting the Charlotte banks long-term debt rating just two notches above junk status.
The bank moved down one notch, the latest in a series of downgrades from the three primary ratings agencies over the last year and a reflection of the banks volatile earnings and an increasingly uncertain global market.
While Bank of America avoided the more severe downgrade that hit a number of its peers, the bank remains in the group Moodys deems the riskiest, with thinner buffers to absorb shocks and lingering mortgage issues weighing down progress.
Morgan Stanley was also cut two notches, less than had been feared. JPMorgan Chase & Co., Citigroup Inc., and Goldman Sachs were also affected. Wells Fargo & Co. was not reviewed.
Bank of America said it has adequately prepared for the downgrade.
In addition to strengthening our governance and risk management, Bank of America ended the first quarter of 2012 with record capital ratios, record liquidity and substantial reserves, spokesman Jerry Dubrowski said in a statement. We have significant liquidity and resources to serve clients and customers as we have transformed the company.
The downgrades have been anticipated since Moodys announced it would put banks with global capital markets exposure under review in February, as the ratings agency wanted to take another look at them amid market volatility.
Since then, the capital market outlook has only worsened. The U.S. has turned in disappointing jobs numbers, Spains sovereign bond yields and unemployment have worsened and Chinas growth has slowed.
Moodys said Bank of Americas downgrade was largely driven by the size and cost of its capital markets operation, its earnings volatility and potential losses in other divisions that give the bank less of a buffer from trading losses.
The ratings agency did say it was encouraged by Bank of Americas increasing liquidity and capital levels as well as its improving risk management.
The banks primary rating outlook remains negative, however, since its position is still influenced by the understanding that the government might prop up the bank if needed. Moodys recognizes, though, that the government guarantee is becoming less certain.
Downgrades generally mean that a companys borrowing cost will be higher, though the current markets low rates mean the banks cost of funding wont become inordinate. For Bank of America, the move will likely put a dent in its liquidity.
In its latest quarterly filing, the bank reported that a downgrade of one notch from the ratings agencies would require it to post another $2.7 billion in collateral on derivatives contracts as of March 31. Bank of America could also be liable for $3.3 billion in derivatives terminated as a result of the downgrade, offset by $2.5 billion in collateral the bank has already posted.
The KBW bank index fell more than 2 percent Thursday as investors prepared for the downgrades, which had been expected that evening. Bank of Americas stock fell nearly 4 percent, though it rebounded some in after-hours trading.
Many analysts said the stock price had largely accounted for the long-anticipated downgrade.
Ratings agency downgrades have also lost some of their importance since the financial crisis, when a number of investments given top ratings were found to be full of defective assets, said Ken Thomas, a Miami-based an independent bank analyst and economist.
It will have some effects here and there, but how the markets will take it, how the average person in the street will take it, its really not going to matter, Thomas said.