Standard & Poor's reduced its credit ratings on 15 big banking companies, mostly in the Europe and the United States, on Tuesday as the result of a sweeping overhaul of its ratings criteria.
JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and UBS AG, were among the banks that had their ratings reduced by one notch each. A notch is one third of a letter rating.
S&P also left the ratings of 20 banks as they were and raised the ratings of two in announcing results from its new ratings criteria for 37 of the world's biggest banking companies. The agency also updated ratings for dozens of bank subsidiaries of the companies.
The two banks which received higher ratings are Bank of China Ltd and China Construction Bank Corp. Ratings on both rose to A from A-minus.
The announcement by S&P comes at a time when the markets for bank debts are on edge because of the European debt crisis. It could increase already-soaring funding costs for some banks. But S&P began warning the markets more than a year ago that it was revising its ratings, perhaps tempering the impact of Tuesday's move on bond and stock prices.
Bank stocks briefly fell on the news in after-hours trading, with the Select Sector Financial SPDR fund down about 0.7 percent at one point, but the declines were short-lived.
"Bondholders and participants in the credit derivatives markets have for some time been trading these major banks as though they would have downgrades," said Allerton "Tony" Smith, a senior director at Moody's Analytics, a research arm of Moody's Corp.
Still, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia, "Banks could see higher funding costs."
S&P's overhaul is part of a broad, multi-year drive by the agency to improve its products and repair its reputation. S&P badly tarnished its image by wrongly putting triple-A ratings on securities backed by subprime mortgages. The agency is owned by the McGraw-Hill Companies Inc.
S&P officials expect the new system to allow the agency to more quickly change ratings when it sees new threats to bank funding or sees governments become less willing to bailout creditors.
The criteria are also intended to make better comparisons of banks around the world by applying consistent measurements of bank capital, S&P officials said.
The downgrades come after Monday's warning by competing rating agency Moody's Investors Service that it could soon downgrade subordinated debt of 87 banks across 15 European Union nations on concerns that governments would be too cash-strapped to bail out holders of the riskier securities.
S&P officials said earlier this month they would gradually roll out the updated ratings for more than 750 banking companies worldwide, starting with an announcement about the biggest banks. The remaining announcements are due in coming weeks.
The outcome of the re-rating of the biggest banks was worse than S&P has forecast for all banks. S&P officials said earlier this month they expected about 20 percent of all banks would see their ratings drop, while 20 percent would get higher ratings and 60 percent would stay the same.
The new ratings method puts more emphasis on the health of the banking industry in the countries where the banks operate, Craig Parmelee, an S&P managing director for financial services ratings, said in an interview.
S&P officials have said they expect the ratings changes will illustrate the increased strength of banks in emerging economies compared with Western Europe and the United States.
Spokespersons for Bank of America, JPMorgan, Goldman Sachs, and Morgan Stanley declined to comment.
In response to growing pressure on their credit ratings, some banks have updated contingency plans for a downgrade. They have also refreshed disclosures on the potential costs they could face through ratings triggers that were written in to terms of some of their derivatives and funding contracts.
(Reporting by David Henry; additional reporting by Richard Leong, Lauren Tara LaCapra, Rick Rothacker, Joe Rauch, Jed Horowitz and Rodrigo Campos; editing by Andre Grenon and Carol Bishopric)