The credit ratings of 17 global and 114 European financial institutions may be cut by Moody’s Investors Service -- a new sign that the impact of the euro zone debt crisis is spreading.
Moody’s said it might cut the long-term credit rating of UBS, Credit Suisse and Morgan Stanley by as much as three notches, while Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings, and Goldman Sachs might be downgraded by two notches. Bank of America and Nomura were included in those that might be downgraded by one notch.
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“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” the ratings agency said in a statement, adding that such factors as confidence and increased risk “have diminished the longer-term profitability and growth prospects of these firms.”
The possible downgrades may increase borrowing costs and force the financial institutions to increase collateral.
European banks’ bond holdings of struggling euro zone nations Greece, Portugal, Ireland, Spain and Italy have trapped Europe in a vicious circle, while funding costs have climbed for banks worldwide as Greece’s debt woes have roiled the world’s financial markets.
“There’s really not a lot of new news here,” said Jeffery Harte, managing director of equity research at Sandler, who follows the banks.
“They’re looking at a secular trend, saying these companies are not going to be a strong as they have been,” he told CNBC. “The real question is how can a company like Goldman Sachs manage the downside risks; I think they have become pretty good at managing these risks.”
Harte added that a downgrade by Moody’s would have a negative impact on the banks.
“It would hurt their cost of funds and how creditworthy they are seen by counterparties, so they would have to pull collateral,” he said.
Speaking at a Banking conference Thursday, Federal Reserve Chairman Ben Bernanke said the weak economic recovery has made it harder for banks to make money from loans, but the financial conditions of smaller institutions appear to be solidifying.
"Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending," Bernanke told a banking conference.
Despite high ratios of nonperforming assets, asset quality appears to be stabilizing and provisions for loan losses at community banks appear to be decreasing, Bernanke said.
Capital ratios also seem to be improving, he added.
The Fed chairman did not extensively discuss the outlook for the economy or monetary policy in his speech. He said he is aware that the central bank's ultra-loose monetary policy has squeezed bank profitability, but argued a stronger economy will boost bank business over time.
The Fed cut interest rates to near zero more than three years ago and said in January that the sluggish recovery is likely to warrant keeping rates at fire-sale levels for around another two years.
"In the longer term the overall effect on bank profitability of an appropriately accommodative monetary policy is almost certainly positive," Bernanke said.
Moody's salvo follows rounds of downgrades in European sovereign ratings as the euro zone's struggle to keep its weakest link Greece afloat has been driving up borrowing costs and straining finances of other nations.
Last Monday, Moody’s cut the ratings of six European nations including Italy, Spain and Portugal and warned it could strip France, Britain and Austria of their top-level AAA grade.
Standard & Poor’s cut France's and Austria’s top ratings and downgraded seven other euro zone nations last month. It also cut the euro zone’s bailout fund by one notch.