The ratings agency Moody's Investors Service may cut the credit ratings of global banks, including UBS AG, by as many as three levels. A three-level downgrade by Moody's would reduce Zurich-based UBS from Aa3 to A3, the fourth-lowest investment grade. Gianluca Colla / Bloomberg

Companies may see downgrades from exposure to EU debt risk

UBS AG, Credit Suisse Group AG and Morgan Stanley's credit ratings may be cut by as many as three levels by Moody's Investors Service, which is reviewing 17 banks and securities companies with global capital markets operations.

Goldman Sachs Group Inc, Deutsche Bank AG, JPMorgan Chase & Co and Citigroup Inc are among companies that may be downgraded by two levels, Moody's said in a statement, adding that the "guidance is indicative only". Moody's cut some European insurers' ratings on Thursday based on risks stemming from the region's sovereign debt crisis.

The potential downgrades, which may raise borrowing costs and force banks to increase collateral, put the ratings company at odds with bond investors, who are sticking with bets that new capital rules and trading limits will make the financial firms safer in the long run. Funding costs have climbed for banks worldwide as Greece's debt woes roil markets.

"In the next two years, these big banks will be less robust than they used to be, that's for sure," Jim Antos, a Hong Kong-based financial analyst at Mizuho Securities Co, said by telephone. "For any bank that has to raise capital today, it's already very difficult. This makes it just that much more expensive and difficult."

Barclays PLC, BNP Paribas SA, Credit Agricole SA, HSBC Holdings PLC, Macquarie Group Ltd and Royal Bank of Canada may also be cut by two levels, Moody's said. Bank of America Corp, Nomura Holdings Inc, Royal Bank of Scotland Group PLC and Societe Generale SA may be lowered by one grade, it said.

Evolving challenges

"Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions," Moody's said. "These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer-term profitability and growth prospects of these firms."

Zurich-based UBS, Switzerland's biggest bank, has a long-term rating of Aa3 at Moody's, and a three-level downgrade would reduce it to A3, the fourth-lowest investment grade. Domestic rival Credit Suisse is currently rated one level higher than UBS at Aa2. New York-based Morgan Stanley is A2, and a three-level cut would drag it to Baa2, the second-lowest investment grade.

The "announcement by Moody's does not immediately affect UBS's ratings" because it has been on review since September, the Zurich-based bank wrote in an e-mailed statement to Bloomberg News. "UBS' financial position is strong and a source of competitive advantage."

As well as UBS, Credit Suisse, Macquarie and Nomura were already on review before Thursday and those examinations are being extended, Moody's said. A one-level downgrade for Nomura would push its long-term rating to Baa3, one grade above junk.

Citigroup has "a strong capital base, robust structural liquidity and ample reserves", said Jon Diat, a spokesman for the New York-based bank, which is facing a cut to as low as Baa2.

The review by Moody's "is likely to have very limited consequences on financial markets which have adjusted over the past few months to a new environment in which banks' ratings overall are lower", said Kate Henley, a spokeswoman for Societe Generale in Hong Kong. A one-level cut would bring the Paris-based bank to A2, still the sixth-highest investment grade.

The threat of downgrades hasn't deterred investors from buying financial debt. The response is similar to that taken in August when financial markets dismissed the US loss of its AAA status at Standard & Poor's by pushing the yield on the 10-year Treasury note to a record-low 1.6714 percent seven weeks later.

Bank bonds from the United States to Europe and Asia have returned 5.8 percent from the end of November through Monday and are poised for the biggest three-month gain since the period ended September 2009, according to Bank of America Merrill Lynch index data.

"The downgrade is unlikely to shake the market a lot as this has been expected for quite some time," said Lewis Wan, Hong Kong-based chief investment officer of Pride Investments Group Ltd, which manages $250 million of assets. "The banking industry - including investment banks, retail banks and commercial banks - will run their business more conservatively because of the increasingly tougher regulations."

The cost of insuring debt of the banks facing the biggest potential downgrades rose after Thursday's announcement.