Market Favoring Retail Banking Franchises: Moody's Analytics

Banks perceived to be most linked to investment banking and European risks have had the worst market-implied rating trends in the last year, as shown by prices on credit default swaps, Moody's Analytics said in a research note Friday.

The research shows the greatest market-implied rating improvements among banks and financial institutions over the last year was for small, regional firms such as Discover Financial Services, which got lifted by three notches to Baa3.

Wells Fargo & Co.--widely viewed as a retail franchise--improved by one notch to A2 last year, whereas none of the five largest banks associated with capital markets improved.

"Numerous uncertainties dog the larger banks, including their vulnerability to European contagion risks, the pace of the economic recovery, lingering exposures to the mortgage mess, and the unfolding process of regulations mandated by the Dodd-Frank legislation," Moody's said.

Goldman Sachs Group Inc.'s CDS-implied rating fell two notches to Ba1 over the year, Bank of America and Morgan Stanley fell a notch to Ba1 and Ba2, respectively, and Citigroup and J.P. Morgan were unchanged at Baa3 and Baa1, respectively.

The average CDS-implied rating on the 18 U.S. banks monitored by Moody's is Baa2. Moody's Investors Service, by contrast, bestows an average rating of A2 on the 18 banks, reflecting a gap of three notches.

"The largest U.S. banks have CDS spreads much wider than a year ago," the report said. "And even though CDS spreads are tighter than they were in the fall, the spreads still result in relatively low CDS-implied ratings, large CDS-implied ratings gaps, and little or no recent improvement in the banks' CDS-implied ratings."

Other small firms receiving a two-notch market-implied upgrade were Capital One Financial Corp., Fifth Third Bancorp., and Popular Inc.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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