Standard & Poor's implemented a sweeping overhaul of its rating criteria on Tuesday that resulted in a downgrade on 15 big banking companies, including the world's last AAA-rated bank. Could this be the end of the AAA era?
S&P announced earlier this month that it will gradually apply the new ratings for more than 750 banking companies worldwide, starting with the largest.
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group, Morgan Stanley, Barclays, HSBC Holdings, and UBS, were among the banks that had their ratings reduced by one notch each. A notch is one third of a letter rating, reports CNBC.
On the upside, S&P left the ratings of 20 banks as they were and raised the ratings of two. But even this was worse than S&P expected. Indeed, "S&P officials said earlier this month they expected about 20 percent of all banks would see their ratings drop, while 20 percent would get higher ratings and 60 percent would stay the same."
Still, other smaller banks have yet to put themselves at the mercy of S&P's new rating system.
Rabobank -- Last to fall
Rabobank was the last to lose its stellar AAA rating, which fell to two notches to an AA rating. As Reuters puts it, "the global banking crisis finally caught up."
For Rabobank, the AAA rating had been a source of pride. Surely the steep downgrade must have felt a low blow, but Rabobank can take solace in the fact that it is still the highest rated privately owned bank in the world, according to S&P. The bank also maintains, for now, its AAA rating from Moody's. Fitch rates it AA+.
S&P's new rating system is part of an attempt to repair the agency's reputation after wrongly slapping AAA ratings on securities backed by subprime mortgages.
"S&P did not say it literally, but they communicated that a bank can no longer have a triple-A rating," Rabobank's Chief Financial Officer Bert Bruggink told Dutch TV program RTL Z on Wednesday. "Nothing is risk free. Even the best countries prove not to be risk free. In that respect, I think S&P's conclusion is a right one." (via Reuters)
As demonstrated, banks have something to fear from the new rating system. But S&P says they expect 20% of banks to get higher ratings under this system. This could lead to some positive market response for those that do receive higher ratings.
To get ideas about which financial companies may benefit from a new rating system we decided to create a screen of financial stocks that have recently experienced a significant increase of institutional buying.
The smart money seems to think these companies have more of an upside than downside. Do you agree?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
1. Brandywine Realty Trust
2. Encore Capital Group
3. EastGroup Properties
4. Enstar Group Limited
5. Financial Engines
7. Knight Capital Group
8. Symetra Financial
10. Walter Investment Management
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity. All other data sourced from Finviz.
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