Moody's Investors Service downgraded a handful of financial companies with global capital-market operations, as part of its broad review to account for sluggish economic conditions and tougher regulations.
"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities," said Moody's Global Banking Managing Director Greg Bauer.
The downgrades are expected to force many banking institutions to post more collateral, and their borrowing costs could increase.
In the U.S., Bank of America Corp. (BAC) was cut one notch to Baa2 from Baa1; its outlook is negative. Citigroup Inc. (C) was cut two levels to Baa2 from A3; its outlook is negative. Goldman Sachs Group Inc. (GS) was downgraded two notches to A3 from A1; its outlook is negative. JPMorgan Chase & Co. (JPM) was cut two notches to A2 from Aa3; its outlook is negative.
Morgan Stanley (MS) was cut two notches to Baa1 from A2; its outlook is negative. Morgan Stanley's shares rose 3.2% to $14.41 after hours, as Moody's initially forecast a potential downgrade of up to three notches.
JPMorgan Chase's shares rose 1.2% after hours to $35.93 and Bank of America saw its shares rise 1.6%. Citigroup's shares were up 0.9% and Goldman Sachs stock was up 0.3%.
In a statement following the downgrades, Citigroup said it "strongly disagrees" with Moody's analysis of the banking industry, adding that it "firmly believes [Moody's] downgrade of Citi is arbitrary and completely unwarranted."
In the U.K., Moody's said the credit rating of Royal Bank of Scotland Group PLC (RBS) was downgraded by one notch to Baa1 with a negative outlook. Barclays PLC (BCS) was cut two notches to A3 with a negative outlook and HSBC Holdings PLC (HBC) was downgraded one notch to Aa3 with a negative outlook.
Lloyds Banking said in a statement that the one-notch downgrade would have limited impact on the bank's funding costs and market capacity.
Royal Bank of Scotland said it "disagreed" with the downgrade. In a statement, the bank said it may have to post an extra GBP9 billion of collateral following the one-notch downgrade. The bank was expected to be one of the hardest hit by a downgrade, analysts said, as its investment banking arm would be particularly vulnerable to higher funding costs. A downgrade "could significantly increase its borrowing costs and limit its issuance capacity in the capital markets," the bank said in the filing.
Moody's also cut its ratings on France's three largest listed banks. Moody's downgraded the long-term debt ratings of BNP Paribas SA and Credit Agricole SA by two notches to A2. The two banks have negative outlooks. Societe Generale SA was downgraded by one notch to A2 with a stable outlook.
Credit Suisse Group AG (CS) was downgraded by three notches to A1 with a stable outlook. Deutsche Bank AG (DB) was downgraded by two notches to A2 with a stable outlook. Moody's lowered its ratings on UBS AG (UBS, UBSN.VX) by two notches to A2 with a stable outlook. Royal Bank of Canada (RY) was downgraded by two notches to Aa3 with a stable outlook.
HSBC, Barclays and Deutsche Bank declined to comment.
In February, Moody's said it would consider possible downgrades for more than 100 financial institutions across the European continent, highlighting the banks' vulnerability to the euro zone's sovereign-debt crisis.
In mid-May, the ratings company kicked off its long-awaited downgrades by lowering its credit ratings of 26 Italian lenders, and has since downgraded banks in Spain, the Netherlands, the Nordic region, Germany and Austria. Many more European banks, as well as major financial institutions in the U.S., were expected to see downgrades by the end of this month. In the U.S., financial giants Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase and Morgan Stanley were all being considered for downgrades.
In February, Moody's pointed to new challenges that its ratings hadn't taken into account, including fragile funding conditions, wider credit spreads, heavier regulatory burdens and more-difficult operating conditions. The ratings company said many challenges had combined to weaken banking companies' overall potential, though many banks have lobbied Moody's hard to dissuade it from making downgrades, arguing they are strong enough to keep their ratings.