U.S. banks, brokerages could see ratings cuts4/11/2002 4:52:19 PM By Dena Aubin
NEW YORK, April 11 (Reuters) - Banks and brokerages managed to dodge ratings downgrades that hit much of corporate America in recent years, but rating agencies are now eyeing several big financial firms for possible ratings cuts.
Bad loans, dwindling trading commissions and underwriting fees put pressure on revenues of banks and brokerages last year. A recovering economy has improved prospects for banks' earnings this quarter, helping lift their share prices, but that may not be enough to help their ratings.
Standard & Poor's has negative outlooks on most of the biggest U.S. brokerages and a number of banks, meaning a downgrade is likely over the next three years. Fitch has negative outlooks on four U.S. brokerages and one major bank.
Moody's Investors Service sees stable ratings for most of the sector, though its outlook for Merrill Lynch & Co. (MER) is negative. Moody's also has PNC Financial Services Group (PNC) on review for downgrade, meaning a rating cut is possible within months.
Not surprisingly, bond investors are cautious.
"There isn't any expectation that these names will get distressed, but from a risk-reward standpoint, it's not a bad idea for some profit-taking," said Gregory W. Lobo, who manages $2 billion of fixed-income assets for HGK Asset Management Inc. in Jersey City, N.J.
"The bonds are not priced for a lot of bad news, and in this market, we've certainly seen what can happen with negative headline risk," he said.
Lobo said he recently sold bonds of Bank One Corp. (ONE) and Banc of America (BAC) to take profits.
"I don't see much upside, though I'm very comfortable with the credits," he said.
CUTS POSSIBLE ON 18% OF U.S. BANKS
Compared with industrial companies, financial services firms have been a safe haven. Since the end of 1999, Moody's has downgraded just 135 financial ratings, compared with 1,054 industrial ratings.
Reflecting that difference, bonds of banks and finance companies posted total returns of 0.21 percent and 0.08 percent, respectively, in the first quarter, according to fixed-income research service CreditSights.com. Industrial companies' bonds lost 1.19 percent in that period.
That trend could reverse in coming quarters, though, CreditSights.com said in a report this week. Interest-rate cuts that buoyed financial firms' earnings last year have ended, and heavy debt issuance expected from the financial sector also could pressure bond prices, the research service said.
In another troubling sign, S&P now has a negative outlook on 18 percent of U.S. banks and thrifts, up from just 7 percent in January 2001.
Banks with negative outlooks include J.P. Morgan Chase (JPM), Wachovia Corp. (WB) American Express (AXP), and Washington Mutual (WM).
Also tagged with negative outlooks by S&P were most of the big U.S. brokerages, including Merrill Lynch, Goldman Sachs Group Inc. (GS), Morgan Stanley (MWD), Charles Schwab Corp. (SCH), Bear Stearns (BSC) and E*Trade Group Inc. (ET).
"We're not seeing tremendous value in bank names," said Deutsche Bank Securities analyst Seth Glasser."We're in a neutral economic environment, and they're trading relatively rich on a historical basis."
This week, new concerns swept through the market when New York Attorney General Eliot Spitzer obtained a court order requiring Merrill Lynch to disclose potential conflicts of interest in its research reports. Spitzer said he is investigating other Wall Street firms that may have given biased stock picks to garner investment banking business.
Banks and brokerages are on better footing, though, than in years past, said Moody's analyst David Fanger.
"If you compare the U.S. banking industry to the way it was in the last recession, it has much stronger core earnings, which gives the industry much greater ability to earn its way out of any problems," Fanger said.
Banks also are more diversified, which limits losses from any one borrower, Fanger added. Enron Corp.'s (ENRNQ) <ENE.N> bankruptcy filing, for example, is unlikely to result in ratings downgrades for banks that made loans to the energy company, he said.



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