This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Bank Stock Rally's Biggest Enemy (Update 1)

Stocks in this article: BAC JPM C MS GS WFC

"Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions," said Moody's in a report of its ratings review.

"These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms," added the agency in its analysis.

Currently, Moody's holds Bank of America in the lowest regard with a Baa1 issuer rating that is two notches above its speculative grade, commonly known as junk. If Moody's followed through with its cut review, Citigroup and Morgan Stanley would join Bank of America at Baa2, a notch above junk. Goldman Sachs would fall to A3 and JPMorgan would fall to A2, the level that the ratings firm holds for Wells Fargo (WFC), which it didn't subject to review.

Stock investors probably didn't fret much over Moody's ratings review, as bank stocks continued a 2012 rally that's boosted Bank of America shares by nearly 50% and those of Morgan Stanley, Citigroup and Goldman Sachs by roughly 25%. Neither did traders of bank credit default swaps, which rise in price when institutions appear more risky and fall when concerns ease. CDS prices fell for all of the U.S. banks under review by Moody's.

But the potential for Moody's to follow through with downgrades and for peer agencies to also enact cuts should give investors pause for concern. Starting in September, Moody's initiated a sweeping cut to the banking sector, which was followed by Standard & Poor's in September and Fitch in December. The rating moves left bank shares battered and many firms on track to post over 20% 2011 stock drops.

Currently, Standard & Poor's has a 'negative' rating on all of the five largest U.S. banks except for JPMorgan, while Fitch Ratings holds all of their ratings at "stable." It signals that like in 2011, Standard & Poor's is likely to act after Moody's but before Fitch in any potential ratings re-assessment.

A Monday report by CreditSights noted that Moody's will likely reduce "standalone" ratings for the group as a whole "from the single-A range to the Baa range probably beginning in the first quarter of 2012 with a review notification and ratings actions within 90 days or so thereafter," according to the report. Standalone ratings refer to ratings that assume no government support for the banks in question.

A recent Fitch Ratings report showed that over nineteen percent of bank bonds were downgraded in 2011, with financial institution cuts accelerating in the fourth quarter. It means that 2011 was the first year of ratings declines since 2007, putting just 15% of banks at an AAA or AA rating, according to Fitch Ratings. Prior to the credit crunch, over 50% of banks warranted those exemplary ratings.

"U.S. bond market's rating drift turned more negative in the last quarter of 2011," note Fitch Ratings analysts Eric Rosenthal and Mariarosa Verda in a Feb. 1 report. "The vast majority of downgrades in the latter part of 2011 were associated with banks, reigniting a four-year decline in the banking sector's rating profile," add the Fitch Ratings analysts.

"Over time market conditions are likely to ease, but Fitch expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs," said Fitch Ratings in December.

As banks near analyst price targets, a simple valuation rise signals that 2012 gains may be muted after a fast start to the year. Analyst estimates compiled by Bloomberg give Bank of America a price target of $9.04, while competitors Citigroup and JPMorgan have price targets of $40.38 and $45.89 a share, respectively. Investment banks Goldman Sachs and Morgan Stanley have price targets of $128.18 a share and $21.86 a share, respectively according to analyst estimates, which signal that Citigroup and JPMorgan may gain the most from current valuations.

For more on bank stocks, see the financial stocks bought and sold by hedge funds and 7 bank stocks loved by Deutsche Bank.

-- Written by Antoine Gara in New York

Readers Also Like:

2 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs