Moody's downgrades credit of 5 big U.S. banks

(MoneyWatch) Moody's Investors Service (MCO) has cut the debt ratings on five large U.S. banks, along with those of 10 other global financial institutions.

Morgan Stanley (MS) received a two-notch cut in its senior long-term debt rating, less than some market observers had expected. The credit rating agency also lowered its rating for Bank of America (BAC), which got a one-level cut, and Citigroup (C), Goldman Sachs (GS), and JPMorgan Chase (JPM), which each saw a two-notch drop.

In announcing the move after the close of trading Thursday, Moody's cited the banks' shrinking growth and dimming profit forecast in explaining the downgrade. The ratings agency also highlighted the firms' exposure to the capital markets at a time of significant market volatility.

"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," said Moody's global banking managing director Greg Bauer in a statement. "However, they also engage in other, often market-leading business activities that are central to Moody's assessment of their credit profiles. These activities can provide important 'shock absorbers' that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges."

Morgan Stanley's long-term senior unsecured debt was trimmed to Baa1, from A2. Rumors had circulated that the investment bank faced a three-notch hit to its credit, with particular concerns about the financial impact of such a cut on the firm's large derivatives holdings. Despite the downgrade, investors seemed relieved that the ratings cut was less severe than had been feared, pushing up Morgan shares 3.5 percent in after-hours trading.

Moody's had been reviewing large U.S. banks for a possible downgrade since February as part of a broader review of the capital markets. Weeks of speculation that the ratings cut would be announced by the end of June could mute the immediate impact for investors, who have been expecting the move for months.

As part of its assessment of global financial firms, Moody's in May downgraded Australia's Macquarie and Japan's Nomura. The KBW Bank Index (BKX), a basket of banking company stocks, fell 2.3 percent on the day, to $44.49, down from a 52-week high of $50.69.

But the ratings cut could increase borrowing costs for the affected banks and spur their trading partners to ask for more collateral in doing business with the firms. 

Other non-U.S. banks that were downgraded include Barclays (BCS), BNP Paribas (BNP), Credit Agricole (ACA), Credit Suisse (CS), Deutsche Bank (DB), HSBC (HBC), Royal Bank of Canada (RY), Royal Bank of Scotland (RBS), Societe Generale (GLE), and UBS (UBS).

Credit Suisse suffered the biggest downgrade. Moody's chopped the bank's credit rating three levels, citing the Swiss bank's exposure to the global capital markets business, heavy wholesale funding requirements, and earnings volatility. The company's ADRs were down 3.8 percent, to $18.57, after hours.