A Boost for Big U.S. Banks: S&P Passes Out Higher Grades

For best results, read the following while humming Edward Elgar‘s "Pomp and Circumstance" — otherwise known as "The Graduation Song." For those of you who never graduated… I’m sure you have other qualities.

Six big banks received some welcome news from Standard & Poors: hiked credit ratings to stave off the cold winter’s chill.

Bank of America went from an AA- to a solid AA, in part due to its "success in creating the first true nationwide banking franchise and in converting this competitive advantage into improved financial performance." That’s according to S&P’s credit analyst John K. Bartko. However, Bank of America wasn’t given free license to sit on its laurels: S&P expects profitability and asset quality to be modestly pressured, but to remain acceptable for the current rating.

Citigroup also got an AA, up from its AA-. As <i>Business Week</i> put it, "Strong earnings generation from an extraordinarily diverse set of businesses allows Citi to cover some of the high risks that it incurs. Citi has also achieved a substantial change in its control environment in the aftermath of a wave of heavy litigation expenses and criticism of its business practices from regulators around the world. The period of adjustment is over, and Citi has been investing heavily to stimulate organic growth. These investments should begin to bear fruit in 2007 to reverse the negative operating leverage trend."

JP Morgan graduated from an AA- to an A+. "JPMorgan’s recent performance appears to be improving and is nearing its potential," says S&P credit analyst Tanya Azarchs. If it wants to graduate from an A+, though, it’s going to have to establish a record of consistently higher profitability over a longer period of time.

U.S. Bankcorp said goodbye to its AA- and hello to a solid AA. "The upgrade reflects USB’s continuing generation of well-above-average profitability among its peer group of large regional and large complex banks, even while it has maintained a relatively low-risk business mix and growth strategy," says S&P’s credit analyst Scott Sprinzen. However, S&P points out, it is unlikely the company could sufficiently improve profitability to warrant a further upgrade within the next two years.

Wachovia Corp pulled an A+ out of its AA-. "The ratings on Wachovia reflect the strengths of its retail banking franchise, strong diversification of earnings, and the expansion of its consumer lending franchise that has resulted from key acquisitions," says S&P’s credit analyst Victoria Wagner.

Wells Fargo & Co. went from an AA to an AA+, which "reflects the company’s leading market positions in several of its core regional banking business lines, consistency of core profitability, and strong capital measures that are leading among the large bank peer group," says Wagner.