Bank of America, Morgan Stanley and Citigroup could be downgraded next year, according to a Dec. 6 report published by Nomura Securities International  that warned that downgrades for any of the three could impact their ability to operate readily in the commercial paper and repo markets and chase up funding costs.

“While its not a done deal, at present Bank of America, Citi & Morgan Stanley appear most at risk of being downgraded to tier 2 status ('A-2','P-2' short-term ratings),” according to analysts at Nomura.

Nomura analysts added further that a downgrade to 'A-2' impacts “the ability to issue commercial paper” and “the ability to conduct repo with rating-sensitive counterparties.”

According to the brokerage’s analysts, BofA, Citi and Morgan Stanley balance sheets are in better shape but there remain risks related to mortgage putbacks, European sovereign risk, shrinking balance sheets as well as contracting net interest margins. At the same time, revenues are being eroded changes in regulations.

“We think a downgrade will ultimately drive up funding costs and make it more difficult to compete in certain businesses, but we don’t think it will cause a meaningful loss of funding capacity,” the Nomura report warned.

Currently, Standard & Poor's and Moody’s Investors Service have a negative outlook on Citigroup and Bank of America as well as Morgan Stanley. Fitch’s outlook, meanwhile, is “negative watch” for Bank of America and Citi, but it has a “stable” outlook for Morgan Stanley.

The short term rating for BofA, Citi and Morgan Stanley is A-1 in S&P’s eyes, while Moody’s short term rating for the trio is 'P-1'.

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