S&P cuts BofA, Citi outlook to negative

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Standard & Poor’s Ratings Service said Tuesday that it downgraded its outlook on Bank of America and Citigroup to negative from stable.

The move underscored that the global financial crisis is far from over despite BofA, California’s largest bank, repaying the government’s investment of $45 billion in the bank under the federal Troubled Asset Relief Program in December. The revised outlook signals possible downgrades to their credit ratings.

S&P assigns counterparty and debt ratings on Bank of America and Citigroup of “A” and “A-1”

The ratings agency’s change in its outlook for the two big banks reflects the more onerous terms BofA or Citi would face if another government bailout is needed.

“We believe there is increased uncertainty about the U.S. government’s willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders,” S&P analyst John Bartko said in lowering the outlook on the banks.

“We previously stated our belief that the extraordinary support was temporary. We believe markets are beginning to stabilize and the U.S. government is seeking ways to reduce the potential for moral hazard and systemic risk associated with large financial institutions,” Bartko added.

S&P pointed to proposals to tax the big banks to help recoup the cost of the bailout and a bill introduced in December to prohibit company-specific bailouts as raising concerns about the terms of another big bank bailout, if needed.

S&P’s rating on BofA gets a lift of three credit notches based on expectations that the government would step in to help BofA (NYSE: BAC) and Citigroup, (NYSE: C) given their status as systemically important financial institutions.

“We are uncertain whether BofA will be able to show sufficient additional improvement over the next two years in its operating performance and profitability to benefit its stand-alone credit profile,” Bartko said.