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'Worst-Case Scenario' Bank Downgrades Unlikely: Analyst

Moody’s will likely downgrade some of the credit ratingsof 17 global and 114 European financial institutions, but the downgrades likely will not result in a worse-case scenario, one analyst told CNBC.

Jeffery Harte, a bank analyst at Sandler O’Neill, said Moody's warning on Thursday did not include "a lot of new news" since the market has been worried about regulation and a weak capital markets environment for a while now.

“The real question, though, is not what are the risks — they have been clearly identified and are well known,” Harte said. “It's how can a company like Goldman Sachs or Morgan Stanley manage those risks? And I think that's where we may not see as big of a downgrade as some of the reports are suggesting because I think they’re getting pretty good at managing some of those risks.”

He called a potential three-notch downgrade of Morgan Stanley “a worst-case scenario” — but one that he does not envision occurring.

Such a large downgrade would have a direct imact on the company, he said. Depending on whether it is long-term or short-term, a downgrade would hurt a bank's funding costs and would also hurt how credit worthy the bank is viewed by counterparties, resulting in the need for more collateral.

“I think when Moody’s digs more through some of the things Morgan Stanley’s done, we'll see somewhat less of a notch reduction," he said. " And, really, a one-notch reduction — even a two-notch reduction — I think is pretty manageable. Three gets a little scary."

Moody's said it was reviewing the long-term ratings and standalone credit assessments of Bank of America , Citigroup , Goldman Sachs, JPMorganChase , Morgan Stanley and Royal Bank of Canada.

The long-term ratings and standalone credit review of European banks includes Barclays, BNP Paribas, Credit Agricole, Deutsche Bank , HSBC, Royal Bank of Scotland and Societe Generale.

Even if downgrades spur the slide of banks’ debt to non-investment grade, Harte said U.S. and European central banks can still choose to take these securities to keep liquidity in the system.

Additional News: Moody's May Downgrade 17 Banks, Securities Firms

Additional Views: Morgan Stanley Bulls Look for More

Disclosures:

Sandler O’Neill expects to receive or has received compensation for investment banking and non-investment banking services.

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