Rating Agencies Are Wary of NY Banks
Bank stocks and bonds have been rallying in recent months, but the leading rating agencies do not fully share investors' enthusiasm - especially when it comes to the New York money-center banks.
Standard & Poor's last week cut its long-term outlook from "stable" to "negative" on Bankers Trust New York Corp. and Bank of New York Co. Inc., citing concerns about profitability and asset quality. Moody's Investors Service has recently voiced similar concerns in a report on New York real estate.
Analysts at Standard & Poor's and at Moody's are not talking about wholesale rating changes for the money-centers.
But by reducing their so-called outlook for the banks, they are essentially saying that if asset quality continues to deteriorate, downgrades could lie ahead. Such downgrades usually make it more expensive for banks to raise new capital.
Right now, Bankers Trust senior debt is rated A-1 by Moody's and AA by S&P, while Bank of New York is rated A-3 by Moody's and A-minus by S&P.
"I don't think we've gotten to the bottom in New York," said Ann Robinson, a vice president at Donaldson, Lufkin & Jenrette. "It's kind of a cosmetic move, but I do think the outlook could be characterized as negative."
To be sure, this year is not as bad as last year, when the rating agencies repeatedly battered the banks, leaving some of the country's largest banks a hair's breadth away from junk status. Moody's issued three downgrades to banks in May, down from an average of nearly eight a month last year.
Standard & Poor's reduced ratings on four banks in May, against about six a month in 1990.
Yet even as the pace of bank downgrades slows, analysts at Moody's and Standard & Poor's remain concerned, particularly about banks in the Northeast.
"We think the banking industry is sort of an A-minus for large banks. Over the last year, it's probably slipped from A to A-minus," said Tanya Azarchs, a vice president at Standard & Poor's. "We think there's still some more downward pressure on the ratings."
Concern over Nonperformance
The concern about asset quality was evident in Standard & Poor's reevaluation of its outlook for Bank of New York. The agency described the bank's nonperforming real estate assets as "excruciatingly high," and added that the corporate banking sector and the securities-processing business face a tough operating environment.
Moody's voiced the same worries in a report on New York area real estate. The rating service pointed out that commercial real estate values are deteriorating; the report also said additional downgrades of banks are possible as a result.
"We have about a two- to three-year view on asset quality as a serious problem for the New York banks," said Mara Hilderman, a senior analyst at Moody's.
"Our outlook is for the problems of commercial real estate and highly-leveraged-transaction loans to worsen."
The bank bond market was quiet Monday, with yields on many higher-yielding bonds declining slightly relative to Treasuries.
Bonds of Southeast Bank Corp. dropped last week from 47 cents on the dollar to 37 cents in price on very low volume amid news reports about the banking company's declining deposits, but the securities have not traded actively since then.