Weak or Strong, Banks Take Ratings Hits

Washington Mutual sinks in several areas, but Fitch also lowers BNY Mellon from positive to stable.
Stephen TaubSeptember 25, 2008

Credit-rating agencies are taking negative actions against banks both weak and strong — issuing downgrades for Washington Mutual on the low end, and Bank of New York Mellon on the high.

Fitch Ratings downgraded WaMu’s long-term Issuer Default Rating (IDR) to ‘B-‘ from ‘BBB-‘ and placed WaMu and subsidiaries on Rating Watch Evolving, citing the increased likelihood of a partial sale of the nation’s largest thrift. Fitch also downgraded and placed on Rating Watch Evolving the bonds issued by WaMu’s Covered Bond Program to ‘BBB+’ from ‘AA’.

“The multiple notch downgrades reflect the heightened uncertainty associated with WaMu’s debt obligations in light of the difficult market conditions and increasingly limited options to bolster capital,” Fitch said.

It said also that it is more likely that WaMu will sell part of the company, rather than complete a merger. Fitch asserted that WaMu’s retail branch network remains very attractive to a number of stronger financial institutions, citing its strong market share on the west coast and in Florida, along with a growing presence in New York City. It noted WaMu currently has about $140 billion in core deposits.

On the other hand, it said that WaMu’s loan portfolio remains a concern to potential buyers due to high levels of delinquencies and uncertain housing price trends. “As a result, any partial sale would likely be detrimental to WaMu’s holding company creditors and potentially to unsecured debt holders at the bank level because they are effectively subordinated to depositors and the considerable amount of secured financing,” Fitch stated in a report. “While a combination with a stronger banking organization remains possible, and would result in an improvement in the credit position of WaMu’s creditors, the exceedingly high level of general market uncertainty at the present time makes a merger significantly less likely at this time.”

Meanwhile, Standard & Poor’s lowered its counterparty credit rating on Washington Mutual to ‘CCC/C’ from ‘BB-/B.’ At the same time it affirmed the ‘BBB-/A-3’ counterparty credit rating on Washington Mutual Bank because, citing the breadth of its retail franchise.

“The downgrade was due to the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors,” S&P said. It also lowered the preferred stock rating to ‘CC’ from ‘B-‘ to reflect the incremental risk of default of these securities, and said the outlook remains negative.

After reviewing BNY Mellon Corp., Fitch revised the rating outlook to stable from positive, although at the same time Fitch affirmed all debt, individual and support ratings.

Fitch said that its action followed the bank’s announcement that it will incur a $425 million after-tax charge in the third quarter of 2008 to support four commingled cash funds used for overnight cash sweeps, one commingled fund related to securities lending collateral reinvestment, and four money market mutual funds. All funds were affected by holding obligations of Lehman Brothers, which recently declared bankruptcy.

“Fitch’s rating action reflects the headwinds that face BK in the current market environment. In addition to the current support-related charges,” it said in a report. “BK’s results in recent quarters have been pressured by previous support charges as well as other than temporary impairment in the investment portfolio. The market environment increases the possibility that future earnings results will face pressure from these or similar sources. Consequently, Fitch does not expect BK to generate the earnings momentum that would enable it to move to the next higher ratings level in the near term.”

Fitch did stress, however, that the BNY Mellon’s financial underpinnings remain strong. “Liquidity is very good, as BK’s core servicing businesses generate considerable amounts of stable, low-cost, short-term funds in most market environments,” it added.

It affirmed the Long-term Issuer Default Rating of ‘AA-‘ and Long-term senior ‘AA-‘ rating for BNY Mellon Corp. and the affiliates.