Updated from 2:22 p.m. ESTFitch Ratings on Friday downgraded Bank of America's ( BAC) and Citigroup's ( C) individual ratings and preferred shares to junk status, as the banks face increasing pressure from mounting losses and the souring economy. BofA and Citi, each of whom have sold $45 billion preferred equity stakes to the Treasury Department through the Troubled Asset Relief Program and had billions more in illiquid assets guaranteed by the federal government, could just be the first in a string of downgrades from the ratings agency, as it applies new criteria for evaluating banks in receipt of bailout funds. A report issued by Fitch on Wednesday says that risk of deferral on preferred stock has greatly increased as a result of the current crisis. The report refers to capital infusions in the banks over recent quarters that have provided a buffer against weakened earnings. "While the additional capital is helpful in some respects, the additional debt service burden created heightens the risk for these entities as well," the report says. "
Noting Merrill's $15 billion fourth-quarter loss and additional performance pressures going forward, Fitch lowered BofA's individual rating to C/D from C and its rating on the preferred stock to BB from BBB, with a negative rating watch for both. Fitch reaffirmed Bank of America's A-plus long-term and F1+ short-term issuer default rating, with a stable outlook for the long-term rating. The ratings agency expressed concern over expected losses on BofA's home equity loan, credit card portfolio and commercial loan book, and noted that although government backstops to $118 billion in Merrill assets, additional charges on unprotected assets may hinder performance. Bank of America CEO Ken Lewis said in a CNBC interview Friday that he does not anticipate that his company will take additional money from the government, and added that he's hoping to repay the bailout money "within three years." After reaching a multiyear low of $3.77 during the previous session, Bank of America shares closed up 26.7% to $6.13 in Friday trading. The stock led a rally ahead of an expected announcement from the Obama administration of its plans to address the bankign crisis. Fitch downgraded Citi's individual ratings to C/D from C. It also cut its rating on Citi's preferred shares to double B from triple B. The individual downgrade reflects "current and expected financial performance challenges," despite the company's efforts to build its loan loss reserves, Fitch says. "Nevertheless, global economic difficulties are causing the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently, provisioning needs are expected to remain quite elevated for 2009," Fitch says.
Fitch has concerns regarding the "large servicing costs" related to the large stake the government has taken in the company, which will cost $1.8 billion a quarter in preferred and trust preferred shares in Citi's capital structure. "When combined with a weak performance outlook, the magnitude of these ongoing costs raises the probability for deferral," the note says. Fitch affirmed Citi's long-term and short-term issuer default ratings of A plus and F1 plus respectively, "given Citi's systemic importance and the magnitude of support measures from the U.S. government," it said in a note. The company in January was forced by the government to split in two: Citicorp, the good bank and Citi Holdings, the bad bank. Citicorp, the so-called "good bank," will be comprised of its global institutional business as well as continuing consumer bank. Citi Holdings, the so-called "bad bank" will be comprised of its brokerage and asset management arm, consumer finance and a special asset pool. Shares of Citi surged 10.8% to $3.91.