Morgan Stanley and 14 Others Cut by Moody’s; Bank Shares Rise

Moody’s downgraded 15 banks after the market closed on Thursday, with most receiving either one-notch or two-notch downgrades.

“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”, says Moody’s Global Banking Managing Director Greg Bauer.

Morgan Stanley (MS) was cut two notches by Moody’s to Baa1 today as the ratings agency released its review of bank credit ratings. The bank was spared the three-notch downgrade that many observers had feared, and shares rose 4.7% immediately after the news was released. Moody’s outlook for Morgan Stanley is negative.

“The negative outlook on the parent holding company reflects Moody�s view that government support for US bank holding company creditors is becoming less certain and less predictable, given the evolving attitude of US authorities to the resolution of large financial institutions, whereas support for creditors of operating entities remains sufficiently likely and predictable to warrant stable outlooks,” said Moody’s.

Bank of America (BAC) (1 notch), Goldman Sachs (GS) (2 notches), JPMorgan Chase (JPM) (2 notches), and Citigroup (C) (2 notches) were also downgraded, along with several foreign banks. Credit Suisse (CS) was hit with a three-notch downgrade. Most were trading higher after the release.

Moody’s placed the banks into three categories, with the institutions raising the most concerns falling into the third group.

“The third group of firms includes Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland (RBS). The capital markets franchises of many of these firms have been affected by problems in risk management or have a history of high volatility, while their shock absorbers are in some cases thinner or less reliable than those of higher-rated peers. Most of the firms in this group have undertaken considerable changes to their risk management or business models, as required to limit the risks from their capital markets activities. Some are implementing business strategy changes intended to increase earnings from more stable activities. These transformations are ongoing and their success has yet to be tested. In addition, these firms may face remaining risks from run-off legacy or acquired portfolios, or from noteworthy exposure to the euro area debt crisis.”

The new ratings are likely to increase borrowing costs for banks.

Moody’s has been reviewing the banks for months to reassess their credit quality in light of the severe strains on capital markets and the global economic slowdown.