The Zacks Analyst Blog Highlights: Moody's, Bank of America, Citigroup, Wells Fargo and Goldman Sachs Group

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Jun 06, 2011, 09:30 ET

CHICAGO, June 6, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Moody's Corp. (NYSE: MCO), Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), Wells Fargo & Co. (NYSE: WFC) and Goldman Sachs Group Inc. (NYSE: GS).

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Here are highlights from Friday's Analyst Blog:

Rating Cuts Threaten Big Banks

Will the government protect big banks anymore? Will the "too big to fail" presumption stick around anymore? The answers to these questions will determine rating agencies' actions on major U.S. banks.

These perceptions may no longer hold true. At least, that's what the Dodd-Frank act clearly conveys. Ratings accorded by agencies that were inflated assuming that mega banks are entitled to government protection by default during a major financial crisis, can now be downgraded.

First among the rating agencies, Moody's Investors Service, a unit of Moody's Corp. (NYSE: MCO), said on Thursday that it is reviewing the ratings of three mega banks, Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C) and Wells Fargo & Co. (NYSE: WFC) for possible downgrades.

The agency had given strong investment-grade credit ratings to these banks on the presumption of obvious government shelter. However, now the agency is weighing the odds of government support to these banks after the rules of Dodd-Frank financial act are put into practice.

Currently, Bank of America, Citigroup and Wells Fargo respectively hold Aa3, A1 and Aa2 from Moody's. Without the presupposition of government support, these ratings would have been about three to five notches lower.

The reviewing process would take maximum three months. According to the rating agency, the magnitude of downward rating revision will be inversely proportional to the improvement of asset quality and capital position of these banks by that time. As a result, there will be normal ratings cushion like other small and medium sized banks.

Then again, Moody's does not entirely discount government support to these banks. While the agency will definitely not rule out government backing, it might tone down its stance to some extent.

What would be the implication for banks if their credit ratings are downgraded? Apart from losing out on investors' confidence, these banks would face high cost of borrowing. The reason is that investors would invest in these low rated banks if they are compensated for taking higher risk.

Apart from these three, five more banks enjoy higher ratings from Moody's based on federal government support, such as Goldman Sachs Group Inc. (NYSE: GS).

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