U.S. banking system upgraded: an opportunity for investors

S&P lifted its outlook on the U.S. sovereign rating from negative to stable. The rating action reflects S&P's view that some of the downside risks to the 'AA+' rating on the U.S. have receded to the point that the likelihood of a rating downgrade in the near term is less than one in three. Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office (CBO), last month, to revise down estimates for future government deficits.

S&P also cited a somewhat improved US political climate following a year-end 2012 ‘fiscal-cliff’ deal and a US economic environment that should lead the country to "match or exceed its peers in the coming years".

This follows action by Moody’s last week (please refer here ) of changing its outlook on the U.S. banking system to stable from negative, where it had been since 2008. The agency cited "continued improvement in the operating environment and, more importantly, reduced downside risk to the banks in the event the economy falters" as the driving factors in its outlook change.

As stated last week we prefer U.S. banks that are less vulnerable to rising interest rates such as broker/dealers Goldman Sachs and Morgan Stanley as well as JPMorgan and Citigroup as compared to Wells Fargo and the more retail focused banks.