July 25 (Reuters) - Riskier investment portfolios and complex hedging strategies could lead to credit rating downgrades for the biggest, most complicated banks, although immediate action is not expected, ratings agency Standard & Poor’s said in a report this week.
Most large banks have straightforward investments such as Treasury and U.S. government-backed securities, but the portfolios at Citigroup Inc, Wells Fargo & Co and JPMorgan Chase & Co have a significant amount of riskier investments such as foreign securities, nonagency mortgage-backed securities and commercial mortgage-backed securities, Standard & Poor’s said in Tuesday’s report.
JPMorgan highlighted the risks in bank investment portfolios in May when it disclosed a flawed trading strategy in its Chief Investment Office. The bank has lost $5.8 billion so far on the trades and could lose another $1.7 billion, executives said this month.
As the economy and financial markets remain weak, some banks could seek out riskier investments to bolster revenue and profit, Standard & Poor’s analysts, led by Stuart Plesser, wrote. “If this occurs in a significant manner, we could lower our ratings on a bank that is undertaking such activity,” the report said.
Bank investment portfolios have grown as banks have sought to make returns by investing excess deposits amid subdued loan growth, Standard & Poor’s said. Acquisitions forged during the financial crisis have also bulked up portfolios.
As an indicator of risk in investment portfolios, Standard & Poor’s examined the percentage of so-called Level 3 assets, referring to the most difficult-to-value and least liquid investments. As of March, Wells Fargo had the highest percentage (14.5), followed by PNC Financial Services Inc (13.6) and JPMorgan (6.8). (Reporting by Rick Rothacker in Charlotte, N.C.; editing by Matthew Lewis)