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BofA, Wells Fargo Face Possible Lower Ratings

Thursday, 05 Mar 2009 11:08 AM

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Moody's Investors Service is reviewing whether to lower its ratings on Bank of America Corp. and Wells Fargo & Co., citing the impact that future credit costs could have on the banks' capital ratios.

The ratings agency said the action has no impact on the FDIC-guaranteed debt issued by both banks, which remains at "AAA" with a stable outlook.

BofA's senior debt is currently rated "A1," four notches below the highest "AAA" rating. Wells Fargo's senior debt is rated "Aa3," three notches below triple-A.

Moody's said its review was prompted by a concern that the capital ratios of both Wells Fargo and Bank of America could deteriorate from current levels, which are comparatively low, because of the potential need to book hefty bad debt reserves and absorb additional charges related to their capital markets exposures.

Moody's said that while Bank of America's current regulatory capital position is "quite strong," its Tier 1 capital depends heavily on preferred stock.

"Asset quality problems are likely to require further loan loss provisions at Charlotte, N.C.-based Bank of America over the next few years," said David Fanger, Moody's senior vice president.

In addition, although Bank of America benefits from a loss-sharing arrangement with the U.S. government on a pool of $118 billion in capital markets-related assets, Fanger noted it remains exposed to a $10 billion first loss position on those assets.

"Earnings are therefore likely to be weak and, in light of Bank of America's sizable preferred dividend, could place significant additional pressure upon the company's already modest tangible common equity position," Fanger added.

Moody's also is concerned that Wells Fargo's capital will be pressured by the bank's need to record provisions and merger-related expenses — mainly this year and in 2010 — against Wachovia assets that were not marked down on Dec. 31. The ratings agency noted that an ailing housing market and higher unemployment will likely result in higher loan loss provisions for the San Francisco-based bank's legacy portfolio at a time when revenue could be constrained.

Moody's said it expects that if Bank of America's or Wells Fargo's capital ratios fell sharply, they would "almost certainly" receive more government aid. While that would help all depositors and holders of senior and senior subordinated debt of the bank and the bank holding company, it could potentially harm junior subordinated or preferred stock investors since the aid could come with the condition that the banks suspend their dividends or conduct a distressed debt swap.

Moody's said it expects any downgrade of either bank's ratings for deposits, senior debt and senior subordinated debt would be limited to one notch, but warned that a multi-notch downgrade is likely for the banks' financial strength ratings.

Moody's expects the reviews of both banks to be complete by the end of the month.

Separately, Moody's said it changed its rating outlook on JPMorgan Chase & Co. and its units to negative from stable, expecting the New York-based bank's results will continue to be saddled by high bad debt provisions and credit costs for the next four to six quarters.

As a result, Moody's believes JPMorgan's capital generation could be modest at best as the recession dampens investment banking revenue — an important contributor for JPMorgan. The weak housing markets and higher job losses have boosted loss estimates on the bank's residential mortgage portfolio, and Moody's expects more charges will need to be booked against Washington Mutual's $145 billion portfolio than the $30 billion JPMorgan has recorded so far.

The bank's senior debt is currently rated "Aa3."

Moody's said JPMorgan does still have strong capital ratios, high market share and good execution.

But the agency warned that if the bank's capital ratios "deteriorate more than anticipated, expect greater downward pressure on its standalone bank financial strength rating than on its deposit and senior and subordinated debt ratings, which incorporate systemic support."

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