"US government support now key factor in S&P bank credit ratings
Although our ratings ordinarily don’t hinge on a shift in political control, we believe that the government’s potentially extraordinary support is a key ratings factor for the eight major banks the government has deemed to be systemically important,” S&P credit analyst Tanya Azarchs said.
Bank stocks have been pummeled in recent weeks as rumors abound about an Obama administration bank rescue plan. With few concrete details available from the government, stock investors are concerned over whether the plan will be successful in the long term, and what it means for their investments in the short term.
The Obama administration is reportedly considering a two-pronged plan to rescue the banking sector. A “bad bank” prong would buy the marked-down mortgage-related assets from bank balance sheets, allowing banks to clean their balance sheets and potentially attract investors. In a second part of the plan, the government would reportedly extend loss insurance to the assets that banks categorized as held-to-maturity that haven’t yet been marked down.
S&P analyst Azarchs said that while the details of the plan are still being worked out, her firm believes government support for the banks will be a net positive for their creditworthiness - which is good news for bank bondholders.
There was less good news for bank stockholders in Azarchs’ report. She said that if the U.S. economy deteriorates to a point where further loan losses erode common equity, the U.S. government “may be forced to take equity positions or, at the very least, may have to provide more capital infusions to restore confidence in the banking system.” Those actions would most likely dilute the stakes of common shareholders.
An outright nationalization of the banks would stabilize bank credit ratings in the near term, Azarchs said, but would risk stifling innovation and competitiveness in the long term.
She also expressed concern that increasing government control could start to filter into bank lending decisions, affecting who they lend to and how they restructure loans from borrowers that fall into delinquency.
Azarch said Standard & Poor’s started recognizing the federal government’s potential for extraordinary support for the banking industry in December, and that it was now a “central theme” in the firm’s credit analysis, especially for the eight banks identified as systematically important.
“At some point, we believe the U.S. will seek to wean the sector off these support mechanisms and search for ways to contain systemic risk to avert another crisis,” she wrote in the research note. “But that will be difficult to do until the financial markets have stabilized.”
Bank stocks fell Thursday morning, with Bank of America shares hitting a 25-year low before recovering around midday as part of a broader rally on Wall Street. Bank of America shares were down 3.4% recently at $4.54 after falling as low as $3.77 earlier. Citigroup shares were up 2.6% at $3.57 while JPMorgan shares were up 1.7% at $24.43.
In the credit default swaps market, the cost to insure Bank of America debt rose 11% in morning trading while the cost to insure JPMorgan debt declined slightly.
Me:
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“Although our ratings ordinarily don’t hinge on a shift in political control, we believe that the government’s potentially extraordinary support is a key ratings factor for the eight major banks the government has deemed to be systemically important,” S&P credit analyst Tanya Azarchs said.”
How much more explicit can these implicit government guarantees get before everyone realizes that they were always explicit to the banks and investor class?
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