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Banks Biggest Stress Test Remains

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, as in 2011, Standard & Poor's is likely to act after Moody's but before Fitch in any potential ratings re-assessment.

In a March 8 report, S&P noted that only sovereign debt ratings outweighed banks as having a negative bias. Presently the ratings agency holds a 25% negative bias on its bank ratings, posing a "greater than average" downgrade risk.

As bank ratings slide, trading counterparties may demand more collateral to compensate for an increasing credit risk. Increased capital costs would come at an inopportune time for banks with a significant exposure to the capital markets.

"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 its ratings review.

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.

As stress tests were being revealed by the Fed on Tuesday, JPMorgan announced that it would boost its quarterly dividend by 20% to 31 cents, while also launching a $15 billion buyback program. Wells Fargo nearly doubled its quarterly dividend to 22 cents and Morgan Stanley said its capital-return plans and a possible stake in Morgan Stanley Smith Barney were approved by the Fed. The Fed approved a Goldman Sachs dividend and buyback program. Bank of America didn't outline a capital return plan, but it also passed tests.

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-- Written by Antoine Gara in New York.
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