Credit ratings downgrade for banks?

Fitch Places Seven Banks On Ratings Watch

 

Forbes,

13 October, 2011

Fitch said after the market close that it has put seven major banks on a negative ratings watch for both long and short term debt. The banks, Goldman Sachs and Morgan Stanley in the U.S., and Credit Suisse, Deutsche Bank, Barclays PLC, Societe Generale and BNP Paribas in Europe, are expected to be affected by one or two ratings notches, if they are downgraded.

In a statement, Fitch cited the challenges that many banks are facing this year in their investment banking arms and amid the uncertainty the credit crisis in Europe is creating for investors as reasons for the review. Speaking about Morgan Stanley, the agency said:

“Morgan Stanley is undergoing a significant strategic shift in its business, with the stated goal of reducing volatility from traditional investment banking activity and generating more stable fee income streams from Global Wealth Management.

Wealth management is a highly competitive and fragmented sector. Fitch believes it may be several years before contributions by GWM are consistently and proportionately significant”.

Fitch also named volatility as a factor for its heightened attention to these investment banks, saying “These seven banks are among the largest global trading and universal banks. Trading businesses exhibit high reliance on short-term wholesale funding and to varying degrees what Fitch views as more volatile earnings than commercial banking, and with more opaque risk.”

This far along in the euro crisis, the ratings that these banks may actually be too high, Fitch. Could it be that their “rapid innovation and interconnectedness with developments in the rest of the industry and the global economy,” is exposing them to too much risk in a dangerous European economy? The banks themselves will of course beg to differ, and perhaps will as earnings reports for U.S. banks roll out over the next few weeks.