Moody's Investors Service Inc. may be on a course to boost bank ratings to levels that have not been seen since the late 1980s.
After upgrading the debt of BankAmerica Corp. to A1 from A2 on Wednesday, Moody's suggested further increases might be forthcoming by placing a positive "outlook" on the bank. At the same time, the rating agency upgraded its outlooks on Chase Manhattan Corp., Citicorp, and Chemical Banking Corp.
"We're coming full circle to where we were in the mid-1980s," said John Works, a bank bond analyst at J.P. Morgan Securities. "We're not there yet, but we seem to be moving in that direction."
Ratings are a critical element in determining the cost of funding.
Even though rating agencies can maintain outlook changes for as long as a year or 18 months, bank bond analysts said Moody's was clearly sending a positive signal to those banks that are large enough to dominate their competition.
"It's an interesting move on the part of Moody's, because it's been a while since they were willing to say things like this," said Katherine Rossow, a bond analyst at Furman Selz.
Moody's said that the positive outlooks reflect the continuing fundamental improvements in bank ratings.
"Our positive views of the industry are, to a great extent, reflected in the ratings already and have been to this point," said Michael Foley, vice president at Moody's. On average, banks are a full three rating categories higher now than they were in 1991, he said.
The current actions highlight a "more narrow, focused reaction to the increasing importance of scale in these businesses and the potential that these banks are better-positioned going into this environment," Mr. Foley said.
Banks are competing across product lines that increasingly behave like commodities, which require a distribution system to maintain profitability, Mr. Foley said.
Chase, Chemical, Citi, and BankAmerica have leading positions in various business lines that make their earnings streams less vulnerable to challenges from specialized financial services firms.
"Changes in the distribution system are costly," Mr. Foley said. "The ability to compete is tied to having current technology and enough critical mass to make these investments and upgrades. When looking at the companies that have positive outlooks, what is obvious is that they have scale in several business lines."
Analysts said there were a number of other banks that potentially fit this criteria for positive outlooks, including NationsBank Corp. and First Union Corp.
"This reinforces my view that NationsBank is one of the clearest upgrade candidates," Mr. Works said. The J.P. Morgan analyst also cited First Union and the Wells Fargo-First Interstate combination as appropriate candidates for positive outlooks.
Indeed, in its most recent report, Moody's said: "The increasing scale and diversification on the company's businesses may put some upward pressure on the rating."
The outlook changes had almost no immediate effect on the bank bond market, but analysts said that the yield on bank bond spreads could tighten 3 to 5 basis points in the event of an upgrade.
