BofA, Citigroup rating outlooks negative-S&P

NEW YORK Feb 9 (Reuters) - Standard & Poor's on Tuesday revised its rating outlooks on Bank of America Corp and Citigroup Inc to negative from stable, saying there is uncertainty that the government will provide more extraordinary support that benefits debt holders.

A negative outlook indicates a rating downgrade is more likely over the next two years.

"We previously stated our belief that the extraordinary support was temporary," S&P said in a statement. "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."

For example, one U.S. House of Representatives bill (H.R. 4173) would specifically preclude the government from company-specific bailouts, S&P said. The bill would allow the government to use public funds to assist in winding down an ailing financial institution, but only if debt holders incurred losses.

"If such legislation were enacted in the form that has been proposed, it could cause us to revise the analytical basis we currently use for imputing extraordinary government support in our ratings on BofA and other highly systemically important financial institutions," S&P said.

Ratings on Citigroup (C.N) and Bank of America (BAC.N) are currently enhanced by three notches to reflect the potential for additional extraordinary government support, S&P said. Both banks carry S&P counterparty credit ratings of A, the sixth-highest investment grade.

S&P also raised Citigroup's hybrid capital rating by one notch to BB-minus, three steps below investment grade, from B-plus. The upgrade reflects improvement in Citigroup's stand-alone credit profile and an improved capital position, which has lowered risks for hybrid investors, S&P said.

While Bank of America has significantly improved its capital position during the past year and kept its liquidity strong, earnings remain severely pressured, even as recently as the fourth quarter, S&P said.

"Longer term, we believe BofA will achieve and sustain much stronger financial performance than during the crisis period, given its more conservative risk appetite, more cautious underwriting, and the full integration of Merrill Lynch and its retail brokerage operations," S&P said. (Reporting by Dena Aubin; Editing by Padraic Cassidy)