BofA and Citi warned over credit ratings

BofA and Citi warned over credit ratings
By Francesco Guerrera and Nicole Bullock in New York
Copyright The Financial Times Limited 2010
Published: February 9 2010 20:26 | Last updated: February 9 2010 20:26
http://www.ft.com/cms/s/0/e7f8289e-15b7-11df-ad7e-00144feab49a.html


The planned overhaul of US financial rules prompted Standard & Poor’s to warn on Tuesday it might downgrade the credit ratings of Citigroup and Bank of America on concerns that the shake-up would make it less likely that the banks would be bailed out by US taxpayers if they ran into trouble again.

The move came in spite of S&P admitting that Citi and BofA, two of the world’s largest lenders, had bolstered their balance sheets with fresh capital and improved performance in recent months.

The credit rating agency revised its outlook on Citi and BofA from stable to negative, implying that there is a one-in-three chance that it will downgrade the two banks’ single A credit ratings over the next six months to two years.

“The outlook revision reflects our increased uncertainty about the US government’s willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders,” it said in a statement.

BofA said that it was “premature to speculate on what effect, if any, proposed legislation would have on the financial services industry or on Bank of America”, adding it had “significantly strengthened its capital”.

Citi declined to comment on the S&P move but said it was “among the best capitalised banks in the industry”.

Congress is still discussing proposals to give regulators a new “resolution authority” to wind down large financial institutions. The new powers could enable regulators to force creditors of failing institutions to suffer losses on their debt.

During the crisis, creditors of most financial groups fared better than equity holders – who saw their shares plunge in value – as the US government’s bail-outs preserved the value of their debt.

Citi and BofA were among the biggest recipients of federal aid, receiving $45bn (€32.6bn) each as their losses mounted. They have since repaid the funds but the government still owns a 27 per cent stake in Citi.

Goldman Sachs and Morgan Stanley, two other banks that received federal aid during the crisis, have already been put on negative outlook.