Wednesday, November 30, 2011

Analyst: S&P downgrades fair but incomplete

S&P's new bank ratings - which hit Bank of America, Wells Fargo and other top U.S. banks with downgrades Tuesday - are fair, analyst Dick Bove says.

But investors shouldn't panic: "While the rating agency's effort is clearly very impressive, the problem for investors is that these downgrades create the impression that there has been a decline in banking quality," the Rochdale Securities analyst wrote in a research note. "This is not the agency's intention. The ratings reflect a change in the way that the agency thinks about banking quality."

In other words, Standard & Poor's felt its older ratings were "simply too positive," Bove said.

S&P fears a double-dip recession in Europe and additional problems in the U.S. housing market, plus increased regulatory pressure that could mean lower bank earnings, he said. Meanwhile, it anticipates more stability in newly industrialized nations and a resulting power shift from west to east.

Bove agrees, for the most part. But he chides the agency for not placing top U.S. banks, including Bank of America, on watch for upgrades.

"It completely ignored the meaningful improvement these banks have demonstrated over the past few years, both in their balance sheets and income statements," he wrote. "To lower the ratings on an industry where all of the key metrics are rising may make sense if it is simply to adjust the ratings to the market reality. However, to fail to indicate that the industry's fundamentals have changed dramatically creates a misimpression that hopefully equity investors will figure out.

"Banking is improving, not weakening."