Fitch’s Concerns over Europe Send Morgan Stanley, Bank Stocks Tumbling This Week

November 18th, 2011 by Trefis Team
-7.57%
Downside
108
Market
99.71
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MS: Morgan Stanley logo
MS
Morgan Stanley

Bank stocks have been hammered in the past week after Fitch Ratings announced its concerns about the outlook for U.S. banks having a sizable capital market exposure to Europe – mentioning that it may lower its “stable” rating for long term outlook of U.S. banks. [1] As Fitch’s announcement relates to banks with large sales & trading operations, investors shed shares of major investment banks while nervously watching every development in Europe. Morgan Stanley (NYSE:MS) was hit the most with an almost 11% decline in stock price over the last 2 days. Shares for each of Goldman Sachs (NYSE: GS), Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and The Royal Bank of Scotland (RBS) Group (NYSE:RBS) also lost about 7% of their value. It comes as no surprise that the hardest hit banks are those which were placed by Fitch on a negative watch for a possible downgrade in rating last month.

See our complete analysis of Morgan Stanley

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Fitch raised an alarm over the long-term health of banks largely due to the ongoing economic turmoil in Italy. The rating agency mentions that while banks have done well to cut their exposure to the worst hit economies of Greece and Ireland, the fact that Italy is faltering could indicate an impending problem with France and Germany – the largest economies in the Eurozone.

Fitch added that the hedging positions taken by most investment banks for their investments in the troubled nations are a source of concern, as the deteriorating economic situation in the region greatly heightens counter-party risk – which is the risk that clients entering into the hedging contracts may not be able to honor them at all.

Finally, Fitch added that the unpredictable and repressed earnings figures investment banks have produced in recent quarters would likely continue for at least a year more – as yields continue their journey south and banks take on more charge-offs to their trading portfolios. This is what triggered the decision to review the long-term outlook for a possible downgrade.

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Notes:
  1. Fitch concerned over U.S. banks’ European debt exposure, Reuters, Nov 17 2011 [↩]