Moody's downgrades Bank of America, Wells Fargo
5:32p ET March 25, 2009 (MarketWatch)
SAN FRANCISCO (MarketWatch) -- Moody's Investors Service downgraded Bank of America Corp. and Wells Fargo & Co. Wednesday on concern the banks may need more government support to boost their capital.
The downgrade of Bank of America contrasted with comments from Chief Executive Kenneth Lewis, who told the Los Angeles Times that he wanted the company to start paying back $45 billion of investments from the government's Troubled Asset Relief Program, or TARP, in April.
Moody's cut B. of A.'s senior debt rating to A2 from A1, the senior subordinated debt rating to A3 from A2 and the junior subordinated debt rating to Baa3 from A2. The ratings agency also downgraded the bank's preferred stock rating to B3 from Baa1 and Bank of America N.A.'s bank financial strength rating to D from B-.
"Bank of America's capital ratios could come under pressure in the short term, increasing the probability that systemic support will be needed," Moody's said in a statement.
Bank of America's regulatory capital position is quite strong, with a Tier 1 capital ratio of 10.7%. However, that is boosted a lot by preferred stock and so-called hybrid capital instruments, including $45 billion of preferred stock that the bank sold to the U.S. government via TARP, according to Moody's.
Bank of America's tangible common equity, a more conservative measure of capital that gives less credit for hybrid securities, was roughly 4.3% of risk-weighted assets at the end of 2008 and could fall to "comparatively low levels," Moody's added.
The agency downgraded Wells Fargo as well for similar reasons.
It's more difficult to raise tangible common equity "because U.S. banks' access to the equity market is shut or very limited at best," said David Fanger, Moody's senior vice president, in a statement. "This increases the likelihood of a capital initiative by the U.S. government to support Bank of America" and Wells.
Despite the downgrades, shares of Bank of America and Wells climbed almost 7% and 6% respectively on Wednesday.
B. of A.'s Lewis told the L.A. Times that he wants to start repaying $45 billion in federal bailout funds next month, after the government's "stress test." He commented that he's seen nothing from the government to indicate that Bank of America will fail the stress test that will be used to gauge the strength of the 19 largest U.S. banks. That test is scheduled to be completed at the end of April.
In the newspaper's report published Wednesday, Lewis also said several financial indicators -- higher stock prices, slowing of home-price declines and improvements in certain consumer-delinquency gauges -- "leads me to think we're starting to see the bottom" of the recession.
Bank of America will be ready to return all the bailout money as soon as the nation's financial system is stabilized, he added.
