(Bloomberg News) Bank of America Corp. and Wells Fargo & Co. had long-term credit ratings downgraded by Moody's Investors Service, which said U.S. support is less likely in an emergency. Citigroup Inc.'s short-term rating also was cut.
The government is "more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute," Moody's wrote in statements today on Bank of America and Wells Fargo. While Citigroup may lose backing as well, its stand-alone credit has shown improvement, Moody's said, confirming the bank's long-term rating.
Investors have regarded the banks as too big to fail after they received government aid in 2008 to keep the financial system from collapsing. Lawmakers have since overhauled regulations and passed the Dodd-Frank legislation to avoid a repeat of bailouts that aided firms including Charlotte, North Carolina-based Bank of America, which received $45 billion.
Bank of America, the biggest U.S. lender by assets, had its ratings cut two levels to Baa1 from A2 for long-term senior debt, and to Prime-2 from Prime-1 for short-term debt, Moody's said in a statement. The outlook on long-term senior ratings remains negative, indicating another cut may be ahead.
The company fell 2.6 percent to $6.72 at 2:05 p.m. in New York Stock Exchange composite trading. Citigroup rose 0.1 percent to $26.96, while San Francisco-based Wells Fargo advanced 1.1 percent to $24.95.
Wells Fargo's senior debt was downgraded one level to A2 from A1, according to a separate statement. The outlook remains negative on the senior long-term ratings.
Citigroup had its short-term credit ratings cut to Prime 2 from Prime 1. Moody's confirmed the New York-based lender's A3 long-term rating, and the A1 long-term and Prime-1 short-term ratings of Citibank N.A., saying the bank's stand-alone credit profile had improved. Liquidity has "strengthened significantly in the past two years and is robust," Moody's said.
Bank of America was unprofitable in three of the four quarters ended June 30 as Chief Executive Officer Brian T. Moynihan, 51, booked more than $30 billion in charges tied to mortgage and credit-card units. The lender dropped by about half this year in New York trading as Moynihan settled disputes over defective loans with bond buyers and insurers. It disputed Moody's decision.
"We believe our ratings should be higher," the company said in a statement. Still, "to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year."
While Moody's said Bank of America has made "significant progress" in improving its capital levels, it didn't upgrade the standalone ratings because of continuing risks from its mortgage operations. Moynihan's predecessor Kenneth D. Lewis acquired subprime lender Countrywide Financial Corp. in 2008.
Rating-firm downgrades could weaken liquidity, limit access to credit markets and pressure businesses that rely on trading revenue, the bank said in an Aug. 4 regulatory filing. A downgrade of the bank by one level at all rating firms could cost the company $1.5 billion in collateral-posting and termination payments tied to derivatives and trading agreements as of June 30, the bank said.
The impact of Moody's decision by itself is "at this point is unknown," said Jerry Dubrowski, a spokesman for the bank.
The cost to protect Bank of America's debt from default for five years jumped to 380 basis points at 12:38 p.m. from 340 before the downgrade, according to broker Phoenix Partners Group. Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bank of America Merrill Lynch's $2 billion of 6.05 percent bonds due in 2016 fell 1.1 cents to 98.3 cents on the dollar to yield 6.48 percent, according to Trace the bond-price reporting system of the Financial Industry Regulatory Authority.
Wells Fargo, led by CEO John Stumpf, 58, has repaid $25 billion in U.S. funds and built capital to meet regulatory thresholds and guard against further declines in housing prices. In March, regulators gave the bank permission to increase its dividend to 12 cents a share and buy back 200 million shares.
Moody's decision "solely reflects a change in their assumption regarding systemic support," Wells Fargo said in a statement.
Citigroup, the third-biggest U.S. bank, posted $29.3 billion in losses tied to sub-prime mortgages for 2008 and 2009 combined and took a $45 billion bailout from taxpayers. Under CEO Vikram Pandit, the bank has since sold troubled assets and returned to profit.
"We completely disagree with Moody's change to Citigroup's short-term rating," Citigroup said in a statement. "It does not accurately reflect the significant progress Citi has made since Moody's last rated Citi more than two and a half years ago."