Publish date:

S&P Cuts Outlook on Citi, Bank of America

Standard & Poor's cut its outlook to negative from stable on Bank of America and Citigroup, citing increased concerns about what will happen if the government does away with its 'too big to fail' mantra.

NEW YORK (

TheStreet

) -- Standard & Poor's cut its outlook to negative from stable on

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

as the ratings agency becomes increasingly concerned about the repercussions to large institutions and their bondholders if the government does away with its 'too big to fail' mantra.

"We believe there is increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders," S&P said on Tuesday. "We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions."

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

TheStreet Recommends

already have negative outlooks assigned to them, S&P says.

In separate notes on Bank of America and Citigroup, S&P analysts cite a recently passed bill by the House of Representatives, H.R. 4173, which would preclude the government from making company-specific bailouts, but instead call for it to use public funds to wind down an ailing institution "only if that entity's debt holders incurred losses."

Also, S&P notes that the proposed Financial Crisis Responsibility Fee would impose a "significant cost burden on the largest banks" and says it "further underscores the extent to which the political climate affects bondholders of these companies adversely."

The agency says it might be forced to revise its analytical approach to factoring "extraordinary government support" into its ratings for Bank of America and Citigroup and other large financial institutions if the proposed legislation were to be enacted in its present form.

Bank of America has greatly improved its capital position by selling assets and other investments and undergoing a multibillion common equity offering in December and successfully repaying TARP. But the Charlotte, N.C.-based company's earnings "remain severely pressured," because of credit problems and the ongoing troubled economy, the note says.

"We are uncertain whether

Bank of America will be able to show sufficient additional improvement over the next two years in its operating performance and profitability to benefit its stand-alone credit profile and narrow the current gap between the counter-party credit rating ... and its stand alone creditworthiness," the note says.

S&P analysts made similar comments about Citigroup in a separate note.

Although S&P cut its outlook on both financial institutions, it affirmed Bank of America's ratings of A/A-1 counterparty credit rating and other ratings. S&P affirmed ratings on Citigroup of A/A-1 as well. S&P also raised ratings on Citigroup's hybrid capital issues to BB- from B+, which excludes preferred stock, rated C.

"Although Citi remained unprofitable in fourth-quarter 2009, we believe it should be able return to profitability within the next few quarters, as credit pressures abate," the note says. "Longer-term, we expect Citi to be able to sustain much more solid financial performance than in 2007-2009, given a more conservative risk appetite in its trading operations, a more cautious approach to underwriting, and the extensive restructuring and cost cutting it has been pursuing."

The six largest

banking institutions

have seen their stocks sink an average of 13% over the past month as regulatory fears persist.

Bank of America shares edged up 0.2% to $14.51 in afternoon trades, while Citigroup's stock advanced 1.6% to $3.20.

--Written by Laurie Kulikowski in New York.