Friday, International credit rating agency Fitch Ratings Ltd. has downgraded Citigroup (C) and Bank of America's (BAC) individual and preferred ratings to junk territory, as the two banks are facing more heat from the huge credit losses amid the deteriorating economy.
Fitch has downgraded these two companies' individual ratings to 'C/D' from 'C' and preferred ratings to 'BB' from 'BBB'. These ratings are on Rating Watch Negative by Fitch.
The rating agency said that the downgrade of Citi reflects current and expected financial performance challenges, despite the company's efforts to build its loan loss reserves, and reducing problematic exposures across many different categories.
Fitch said that the global economic difficulties are causing the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently, provisioning needs are expected to remain quite elevated for 2009.
The rating agency has raised concern over expected losses on Bank of America's home equity loan, credit card portfolio and commercial loan book. Fitch also noted that the bank faces the potential for additional mark to market charges in legacy Merrill assets not protected by the U.S. Treasury loss cap guarantee, as well as potential market value losses.
Owing to the strong support provided by the U.S. government, Fitch has affirmed Citi's Long-term and Short-term Issuer Default Ratings or IDRs of 'A+' and 'F1+', respectively. Fitch has affirmed Bank of America's 'A+' long-term and 'F1+' short-term IDRs.
Both banks have recently received $45 billion of preferred stock investments from the U.S. Department of Treasury under its Troubled Asset Relief Program, including $20 billion in emergency bailouts. The government also agreed to share losses of another $118 billion of troubled assets for Bank of America, and $301 billion of assets for Citi.
Last month, troubled financial services firm Citi reported a net loss of $8.29 billion for the fourth quarter of fiscal 2008, due to write-downs and losses in Securities and Banking, net credit losses, and a $6 billion net loan loss reserve build. The company also said it will realign its businesses into two, Citicorp and Citi Holdings, for future profitable growth.
The company has been implementing various cost cutting measures since Vikram Pandit took over as chief executive officer in December 2007. Citigroup is currently abandoning its acquisition-fueled growth strategy that built the company from a small consumer-finance business into one of the world's largest financial institutions.
Bank of America reported a net loss for the fourth quarter over a profit last year, due to escalating credit costs, including additions to reserves, and significant write-downs and trading losses in the capital markets businesses.
Merrill Lynch, which was recently acquired by Bank of America, also reported a net loss of $15.31 billion or $9.62 per share for the fourth quarter, due to severe capital markets dislocations.
Bank of America had been pleading the government for help, after it said it learnt about Merrill Lynch's losses after the December 5 shareholder vote. Shareholders of the company have been furious with Chief Executive Kenneth Lewis for not having probed on Merrill's losses before the acquisition.
The company has been making all out efforts to raise cash. Kenneth Lewis, and his top executives have reportedly agreed to give up annual bonuses for 2008. On January 7, the largest US bank sold 5.62 billion Hong Kong-listed shares in China Construction Bank Corp. (CICHF.PK) with a reported value of $2.8 billion, citing its own financial situation in the current turbulent international financial environment. With the sale, Bank of America's stake in CCB fell to 16.6% from 19.13%.
Another rating agency, Moody's Investors Service lowered the credit ratings of Hartford Financial Services Group (HIG) and placed a negative outlook on the ratings, citing the continued weakness in earnings and reduced capitalization resulting from investment losses and substantial business exposure to variable annuities.
Yesterday, Hartford Financial reported a net loss for the fourth quarter, hurt largely by investment losses. The company also said it plans to cut its quarterly dividend.
Citigroup is currently trading at $3.89, up 36 cents or 10.20% on a volume of 181.82 million shares. Bank of America is currently trading at $6.05, up $1.21 or 25.00% on a volume of 567.33 million shares.
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