U.S. and European investment banks may face headline risk again from downgrades of their credit ratings when Moody's Investors Service Inc. issues its next ratings review, Nomura Securities warned Monday.
In a research note to clients, Nomura analyst Glenn Schorr said, "Average rating for large capital markets firms could slip to Baa range." That's just one notch above non-investment-grade, or "junk" status.
Moody's is expected to conclude the pending rating reviews between the week of March 26 and the week of May 14.
On Feb. 15, Moody's announced a ratings review of 17 banks and securities firms with global capital markets. Similar to what Standard & Poor's Ratings Services did with its revised bank rating methodology change, Moody's will reassess the ratings given the challenges that the global investment banks face.
"While capital, liquidity, and leverage are all in better shape, the economy is healing and the banks just passed a severe stress test, Moody's feels the business just isn't as good as they used to think," Schorr said.
For the U.S. firms, Moody's has said Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C) and Morgan Stanley (NYSE: MS) could see long-term ratings lowered to Baa2, while Goldman Sachs Group Inc. (NYSE: GS) and J.P. Morgan Chase & Co. (NYSE: JPM) could see their ratings fall to AAA and AA, respectively.
Lower credit ratings and perceived higher risk since the 2008 financial crisis could lead to higher funding costs for the large investment banks.
Eventually, Schorr said, "banks and brokers will likely need to find ways to pass along at least some of the higher funding costs to their customers."
Nomura also warned the stocks of these big banks could slip when Moody's potential downgrades occur.
On Nov. 29, 2011, the day S&P downgraded the five large banks -- Bank of America, Citi, Morgan Stanley, Goldman Sachs and JPMorgan -- their stocks fell 2 percent on average, while the S&P 500 closed up 0.2 percent.
"If history is any guide, the universal bank and broker stocks could decline in the range of 2 percent to 5 percent when the Moody's downgrades occur," Schorr said.
In Monday's morning trading, Bank of America Corp. (NYSE: BAC) shares regained the $10 mark and extended its gain to 79 percent so far this year; Goldman Sachs Group Inc. (NYSE: GS) climbed $1.40, to $124.33 a share; Citigroup Inc. (NYSE: C) rose 2.26 percent, to $37.52 a share; Morgan Stanley (NYSE: MS) was up 1.13 percent, to $19.75 a share; And JPMorgan Chase & Co. (NYSE: JPM) added 7 cents to $44.64 a share.