Among the institutions that could be downgraded are Bank
of America Corp, Citigroup Inc. and Morgan Stanley, said Baylor Lancaster, an
analyst at CreditSights Inc.
Spokesmen for the three banks declined to comment.
Some European banks could also be affected. On Nov. 9,
S&P downgraded its scores for the health of the banking industries in a
number of countries, including Denmark, Sweden, Finland and the Netherlands.
The updates in ratings are part of a major overhaul of
S&P's methods for scoring the creditworthiness of some 750 banking groups.
The agency, the subject of intense criticism because its
positive ratings for mortgage-backed securities played a major role in
inflating the US housing bubble, has been working on the changes for more than
a year.
The updates are part of a broad push by S&P to
improve its products and repair its reputation as its parent, McGraw-Hill Cos
Inc., divides itself into two publicly traded companies.
S&P has taken pains to prepare the markets for the
changes, but when it actually releases results for individual banks some
downgrades could surprise, analysts say.
"One reason there could be surprises is that the new
ratings method is very complex and it has been very difficult to simulate
results," said Beate Muenstermann, a London-based research analyst for the
money management arm of J.P. Morgan Chase & Co.
One area for potential surprise lies in differences
between actions the agency may take on bank holding companies compared with
grades for their operating units. Another is variations between long-term and
short-term ratings.
S&P posted an advance notice of the coming changes in
March 2010 and in January 2011 outlined its initial plans and requested
comments.
Earlier this month the agency published its final
criteria and said it expects 60 percent of all bank ratings to stay as they
are, while 20 percent will go up one notch, 15 percent will fall by one notch
and less than 5 percent will drop by two or more notches. One notch is
one-third of a letter grade — for example, the difference between a rating of
"A" and a rating of "A-minus."
S&P has not said what proportion of downgrades it
expects among only the biggest banks. It has said to expect regional
differences in the results for all banks. Western Europe fared worse than Latin
America and Asia in the Nov. 9 changes in scores for banking industries by
country.
S&P estimated in January that there would be more
downgrades, but the agency lowered some ratings while the plan was being
completed and also eased some of the criteria.
The agency plans to first announce its results for the 30
biggest banks, possibly as early as late this month, and then begin quickly
rolling out its ratings for smaller banks.
"S&P has been extremely good at guiding the
market through this change in the methodology," said Muenstermann.
How the changes are perceived by regulators could prove
to more important to S&P than to the markets. Bond fund managers say the
market has probably already priced in the information underlying S&P's
research and judgments.
"The rating agencies tend to be laggards compared
with prices," said Ryan Brist, a portfolio manager at Western Asset
Management.
S&P's changes may even foretell a coming upturn for
banks, he said. "Historically, ratings agencies tend to change their
methodologies after large downward price movements in the market."
John Croft, a portfolio manager and director of
investment grade research at Eaton Vance, said, "They seem to be fiddling
around with their methodologies more than opining about the underlying credit strength
of issuers."
Still, Croft gives the agency credit for trying to do
better than in the past. Past ratings proved too high on such financial
companies as Lehman Brothers, ABN AMRO and Wachovia, which either failed
outright or were forced into mergers with stronger rivals.
"They are trying to rectify some of the problems
that they have had in the past and to the extent that they do that, it is
good," said Croft.
S&P expects to be able to use the system to more
quickly change its ratings, such as when it sees new threats to bank funding or
changes in how much government bailout support creditors can expect, said Jayan
Dhru, a managing director at S&P, on Friday.
Dhru said S&P's ratings will also make better
comparisons of banks around the world by applying consistent measurements of
bank capital, something that is weak in the ratios banks report under
international Basel standards designed by regulators. The Basel rules allow
individual countries latitude in how their banks count capital.
The agency's performance is under scrutiny from
regulators, who are designing ways to reduce the power and profits from the
ratings business now enjoyed by S&P and its main competitor, Moody's Corp.
S&P made matters worse last week when its computer
systems accidentally sent a note to some customers suggesting that the credit
rating of the Republic of France had been downgraded in the midst of the
European debt crisis.
S&P said later the error stemmed from a computer
programming step it had taken last December with the banking industry country
scores used in the first step of its new ratings method.
