Morgan Stanley’s long-term issuer rating jumped two steps, and grades for Bank of America and two other investment banks’ holding companies rose one step, as Moody’s Investors Service reviewed regulatory changes that make it easier for lenders to weather emergencies by imposing losses on junior creditors.
Charlotte-based Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. had their holding-company grades boosted one level, Moody’s said Thursday. Holding-company ratings were cut for four banks: Barclays Plc, HSBC Holdings Plc, Credit Suisse Group AG and Royal Bank of Scotland Group Plc.
Many of the moves were tied to changes in Moody’s methodology that rewarded the higher volume of senior debt issued by banks’ holding companies. Moody’s also credited Morgan Stanley’s efforts to boost earnings while preventing major swings, and to strengthen capital.
“They have taken a slow and steady approach to profitability improvements, and they have been able to demonstrate that,” David Fanger, a Moody’s analyst, said in an interview. “We had previously some concerns that they would be under pressure to take additional risks, but the shareholders have rewarded the business diversification.”
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Morgan Stanley’s climb to an A3 rating at its holding company and A1 at its bank subsidiary represents a victory for Chief Executive Officer James Gorman, who said earlier this month that he was meeting with Moody’s analysts to help make the bank’s case. Since the financial crisis, Gorman has said the bank is pursuing a safer business model more dependent on its retail brokerage, a steadier source of fees.
In 2012, Moody’s threatened to downgrade Morgan Stanley’s rating by three levels, the most among the biggest U.S. banks, citing a difficult operating environment and greater regulation. Moody’s only reduced it two levels after Gorman argued against a steeper cut. Still, the bank said some clients stopped trading with it while the review was pending.
“The two-notch upgrade is an important codification of all the work we have done and the consistency of our results,” Wesley McDade, a spokesman for the New York-based bank, said in an e-mailed statement.
Spokesmen for Bank of America, Barclays, Credit Suisse, Citigroup and Goldman declined to comment, while HSBC and RBS didn’t immediately respond to requests for comment outside of business hours.
While grades were cut for HSBC’s and RBS’ holding companies, Moody’s said it raised ratings for some of their units.
Moody’s announced the broad review in March, saying it was prompted in part by rules global regulators have been enacting to aid struggling banks in a crisis or resolve those that fail. In many cases, senior bondholders are better protected because the firms have thicker layers of junior securities to bear the brunt of losses, its analysts said at the time.