Credit Outlook Dims for Investment Banks


Standard & Poor's on Monday cut its credit rating outlook for three top U.S. investment banks--Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley--to "negative" from "stable," citing a slump in fees and competition from big commercial banks.

S&P; said the banks are being forced to take on more credit risk and that downgrades could take place within three years. Outlook revisions and downgrades often raise borrowing costs, and indeed on Monday some of the three investment banks' bonds did fall, as did their shares on the New York Stock Exchange.

"You should take away from the negative outlook that there is relatively little tolerance for very bad news," said Tanya Azarchs, an S&P; banking analyst. "You have to do business the way it's being done, or you're not a player."

S&P; rates Merrill Lynch's and Morgan Stanley's senior unsecured debt "AA-minus," its fourth-highest investment grade. It rates Goldman Sachs' debt "A-plus," one notch lower.

Shares of Goldman Sachs (ticker symbol: GS) closed at $83.40, down $2.75. Shares of Merrill Lynch (MER) closed at $53.15, down $1.35, and shares of Morgan Stanley (MWD) closed at $58.45, down $2.97.

S&P;'s outlook revision follows a first-half decline in underwriting fees.

Though heavy bond issuance helped drive first-half underwriting up 36% from a year ago to $1.46 trillion, according to Thomson Financial Securities Data, fees actually fell industrywide to $6 billion from $6.55 billion, largely because of a decline in lucrative underwriting for mergers and initial public offerings.

"The investment banks are facing increased competitive inroads from U.S. commercial banks and European banks," said Timothy Comiskey, director of financial institutions at another credit rating agency, Fitch. "That's beginning to show through a little in market shares and performance measures."

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