On Thursday, Moody’s downgraded 15 banks.
On the surface it seems counterintuitive, but the downgrade is positive for JP Morgan (JPM), Morgan Stanley (MS) and Bank of America (BAC) . My 30 years in markets have taught me that it is always positive when an overhang is lifted.
Back in February, Moody’s telegraphed that it had launched a review of 17 global banks with capital market operations. Moody’s reasoning was that difficult operating conditions, increasing regulation, and lower levels of growth.
The rating cuts are considered negative because they increase funding costs as the banks may have to pay more to borrow. Further, banks need more capital as trading partners may require more collateral.
The other banks that Moody’s downgraded include Goldman Sachs ( GS), Citigroup( C) , Credit Suisse (CS) , Barclays (BCS) , Deutsche Bank (DB) and UBS (UBS).
In my analysis, this rating change is backward looking. I have often written that one of the keys to making money is to give less emphasis to looking in the rear-view mirror and focusing primarily on looking through the windshield.
This is what I see looking through the windshield.
In the U.S., the housing market is improving which is positive for the banks. Unlike 2008, the U.S. banks are very well capitalized and can easily absorb additional collateral requirements triggered by the downgrade.
Banks appear to have tightened their risk controls. Further, it is counterintuitive, but increased regulation may turn out to be a big positive for the banks…Read more at MarketWatch