The banking sector suffered another blow Wednesday, when J.P. Morgan Chase & Co.'s credit ratings were cut by Moody's Investors Service because of concern about the second-largest U.S. bank's ability to "maintain acceptable profitability."
Moody's, citing a drop in lending revenue, falling stock markets and rising bad loans, lowered Morgan's long-term debt rating one level to A1 from Aa3. Morgan shares dropped $1.15, or 7% to a seven-year low of $15.45 on the New York Stock Exchange, and other major bank stocks also slid.
The downgrade, which affects about $42 billion of debt, underscores investors' concern that Chief Executive William Harrison's merger of Chase Manhattan Corp. and J.P. Morgan & Co. two years ago has failed.
Morgan's trading revenue plummeted in summer, underwriting business has dried up and the bank no longer can depend on income from lending to bolster earnings, some analysts said.
"The markets are killing them," said Jeff Rode, analyst at Segall Bryant & Hamill in Chicago. "They have a merger that doesn't work and management is in denial."
Standard & Poor's cut Morgan's credit rating one level last month to A-plus. Its rating and Moody's new rating are five levels below the highest possible grades.
For a bank, a falling credit rating is particularly troublesome because the institutions are perpetually borrowing money in credit markets as part of their normal operations. A lower rating raises the cost of borrowing and may steer some risk-averse investors away from Morgan's debt.
J.P. Morgan spokeswoman Kristin Lemkau declined to comment.
California Muni Sales
Yield Mixed Results
California on Wednesday paid more than it hoped to sell $800 million of long-term general obligation bonds, but the state got a better deal from investors on $9 billion of short-term notes, analysts said.
The difference between yields on California bonds maturing in 30 years and yields on higher-rated municipal bonds of other states had narrowed to about one-tenth of a percentage point earlier this month, according to Bloomberg data. But on Wednesday, the state paid twice that margin on the 30-year bonds it sold.
A group of investment banks led by Merrill Lynch & Co. submitted the winning bid for the California bonds. The bonds maturing in 2032 were priced to yield 4.8%. That interest is free of federal and state income tax.
Analysts said concerns about the state's long-term fiscal health may have pushed investors to demand higher yields.
But strong demand for the state's offering of short-term notes allowed California to boost Wednesday's sale of those securities to $9 billion. Money from the notes will help the state pay off a $7.5 billion borrowing in June that was needed until lawmakers passed a new budget.
The notes, backed by future tax receipts, yielded as low as 1.57% for the issue maturing June 20. "Yields were a little lower than I thought they would be," said Todd Pardula, a fund manager at American Century Investments. Analysts cited strong demand from individual investors.
Salomon to Replace
Stock Research Execs
Citigroup Inc. said two senior equity research executives who supervised former telecommunications analyst Jack Grubman would leave their jobs.
John Hoffmann, global head of equity research for Citigroup's Salomon Smith Barney unit, will retire at the end of the year after 38 years with the company, according to a memo sent to employees.
Kevin McCaffrey, U.S. head of equity research, will become global head of sales and marketing for the company's Internet business. Grubman reported to McCaffrey and Hoffmann.
The management shifts come as Citigroup, which is under investigation by state and federal regulators, is trying to distance itself from criticism that it issued biased research to win investment banking assignments. Grubman, once a star telecom-industry analyst, quit in August amid allegations he misled investors with favorable recommendations of stocks such as WorldCom Inc.
"Analysts' reputations have been besmirched, so there's a reshuffling," said James Angel, a finance professor at Georgetown University. "This is certainly not going to hurt Citigroup's credibility with regulators."
Citigroup named Mark Fulton, chief operating officer for worldwide equity research, to replace McCaffrey. The firm said it's searching for a new global head of stock research.