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Moody's Downgrades Global Banks
Ratings agency Moody's downgraded the long-term credit ratings of 15 major U.S., Canadian, and European banks today after markets in New York closed. Of the 15 firms downgraded this afternoon, none were hit more than Moody's originally said was possible when it placed them on review in February. The action will likely force many of the banks targeted post additional collateral against trades held on their books. Cut One Notch: HSBC downgraded to Aa3 from Aa2 Lloyds TSB downgraded to A2 from A1 RBS downgraded to Baa1 from A3 Societe Generale downgraded to A2 from A1 Cut Two Notches: Bank of America downgraded to Baa2 from Baa1 BNP Paribas downgraded to A2 from Aa3 Barclays downgraded to A3 from A1 Citigroup downgraded to Baa2 from A3 Credit Agricole downgraded to to A2 from Aa3 Goldman Sachs downgraded to A3 from A1 JP Morgan Chase downgraded to A2 from Aa3 Morgan Stanley downgraded to Baa1 from A RBC downgraded to Aa3 from Aa1 UBS downgraded to A2 from Aa3 Cut Three Notches: Credit Suisse downgraded to (P)A2 from (P)Aa2 In February, Moody's also placed Nomura and Macquarie credit ratings on watch for downgrade. However, the agency took action before today, lowering Nomura and Macquarie by one level each, to Baa3 and A2, respectively. Perhaps the best news of the downgrade came to Morgan Stanley, which was on review for a downgrade by as much as three levels. Shares in the bank are up more than three percent in after-hours trade. Analysts estimated that the company could be forced to post more than $5 billion in collateral if it was hit by a downgrade to Baa2. In a short statement after Moody's announced its cuts, Morgan said it had made clear progress, particularly with its Mitsubishi UFJ partnership. "We believe the ratings still do not fully reflect the key strategic actions we have taken in recent years," the company said. SEE ALSO: This Is What The Moody's Downgrades Mean To The World's Largest Banks > Below, the full release.
"All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities", says Moody’s Global Banking Managing Director Greg Bauer. "However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges." The specific credit drivers for each affected firm are summarized below. Today’s rating actions conclude the review initiated on 15 February 2012 when Moody’s announced a ratings review prompted by its reassessment of the volatility and risks that creditors of firms with global capital markets operations face. In the past, these risks have led many institutions to fail or to require outside support, including several firms affected by today’s rating actions. Today’s actions, however, reflect not only the credit implications of capital markets operations. They also reflect (i) the size and stability of earnings from non-capital markets activities of each firm, (ii) capitalization, (iii) liquidity buffers, and (iv) other considerations, including, as applicable, exposure to the operating environment in Europe, any record of risk management problems, and risks from exposure to US residential mortgages, commercial real estate or legacy portfolios. OVERVIEW OF TODAY’S RATING ACTIONS Moody’s has taken action on the following holding company ratings: Bank of America Corporation Long-term senior unsecured debt to Baa2 from Baa1, outlook negative; Short-term P-2 affirmed Barclays plc Long-term issuer rating to A3 from A1, outlook negative; Short-term to P-2 from P-1 Citigroup Inc. Long-term senior debt to Baa2 from A3, outlook negative; short-term P-2 affirmed Credit Suisse Group AG Provisional senior debt to (P)A2 from (P)Aa2, outlook stable; Provisional Short-term (P)P-1 affirmed The Goldman Sachs Group, Inc. Long-term senior unsecured debt to A3 from A1, outlook negative; Short-term to P-2 from P-1 HSBC Holdings plc Long-term senior debt to Aa3 from Aa2, outlook negative; Provisional Short-term (P)P-1 affirmed JPMorgan Chase & Co. Long-term senior debt to A2 from Aa3, outlook negative; Short-term P-1 affirmed Morgan Stanley Long-term senior unsecured debt to Baa1 from A2; outlook negative; Short-term to P-2 from P-1 Royal Bank of Scotland Group plc Long-term senior debt to Baa1 from A3, outlook negative; Short-term P-2 affirmed Moody’s has taken action on the following operating company ratings: Bank of America, N.A. Long-term deposit rating to A3 from A2, outlook stable; Short-term to P-2 from P-1 Barclays Bank plc Long-term issuer rating to A2 from Aa3, outlook negative; Short-term P-1 affirmed BNP Paribas Long-term debt and deposit rating to A2 from Aa3; outlook stable; Short-term P-1 affirmed Citibank, N.A. Long-term deposit rating to A3 from A1, outlook stable; Short-term to P-2 from P-1 Credit Agricole S.A. Long-term debt and deposit rating to A2 from Aa3, outlook negative; Short-term P-1 affirmed Credit Suisse AG Long-term deposit and senior debt rating to A1 from Aa1, outlook stable; Short-term P-1 affirmed Long-term deposit rating to A2 from Aa3, outlook stable; Short-term P-1 affirmed Goldman Sachs Bank USA Long-term deposit rating to A2 from Aa3, outlook stable; Short-term P-1 affirmed HSBC Bank plc Long-term deposit rating to Aa3 from Aa2, outlook negative; Short-term P-1 affirmed JPMorgan Chase Bank, N.A. Long-term deposit rating to Aa3 from Aa1, outlook stable; Short-term P-1 affirmed Morgan Stanley Bank, N.A. Long-term deposit rating to A3 from A1, outlook stable; Short-term to P-2 from P-1 Royal Bank of Canada Long-term deposit rating to Aa3 from Aa1, outlook stable; Short-term P-1 affirmed Royal Bank of Scotland plc Long-term deposit rating to A3 from A2; outlook negative; Short-term to P-2 from P-1 Societe Generale Long-term debt and deposit to A2 from A1; outlook stable; Short-term P-1 affirmed UBS AG Long-term debt and deposit to A2 from Aa3, outlook stable; Short-term P-1 confirmed. Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143274. RATINGS RATIONALE — STANDALONE CREDIT DRIVERS Moody’s assessment of each firm’s standalone credit profile led to the following relative positioning of the firms: –FIRST GROUP The first group of firms includes HSBC, Royal Bank of Canada and JPMorgan. Capital markets operations (and the associated risks) are significant for these firms. However, these institutions have stronger buffers, or ‘shock absorbers,’ than many of their peers in the form of earnings from other, generally more stable businesses. This, combined with their risk management through the financial crisis, has resulted in lower earnings volatility. Capital and structural liquidity are sound for this group, and their direct exposure to stressed European sovereigns and financial institutions is contained. Firms in this group now have standalone credit assessments of a3 or better (on a scale from aaa, highest, to c, lowest). Their main operating companies now have deposit ratings of Aa3, and their holding companies, where they exist, have senior debt ratings between Aa3 and A2. Their short-term ratings are Prime-1 at both the operating and holding company level. –SECOND GROUP The second group of firms includes Barclays, BNP Paribas, Credit Agricole SA (CASA), Credit Suisse, Deutsche Bank, Goldman Sachs, Societe Generale and UBS. Many of these firms rely on capital markets revenues to meet shareholder expectations. Their relative position reflects a combination of differentiating and sometimes adverse factors. Capital markets operations constitute a large part of the overall franchises for Credit Suisse, Goldman Sachs, Barclays, and Deutsche Bank, but less so for UBS, Societe Generale, BNP Paribas and CASA’s cooperative group, Groupe Credit Agricole. Other factors contribute to the relative positioning. For example, Barclays, BNP Paribas and Groupe Credit Agricole have, to varying degrees, relatively robust shock absorbers. Exposure to capital markets businesses is very high for Goldman Sachs, but this is balanced by a record of effective risk management. Barclays, BNP Paribas, Groupe Credit Agricole, and Deutsche Bank also have sizeable but varying degrees of exposure to weaker European economies. Some firms are relatively weak with regard to structural liquidity or reliance on wholesale funding. Firms in this group now have standalone credit assessments of baa1 or baa2. Their deposit ratings range between A1 and A2, and their short-term ratings are Prime-1 at the operating company level. Their holding companies, where they exist, have senior debt ratings between A2 and A3 and short-term ratings between Prime-1 and Prime-2. –THIRD GROUP The third group of firms includes Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland. The capital markets franchises of many of these firms have been affected by problems in risk management or have a history of high volatility, while their shock absorbers are in some cases thinner or less reliable than those of higher-rated peers. Most of the firms in this group have undertaken considerable changes to their risk management or business models, as required to limit the risks from their capital markets activities. Some are implementing business strategy changes intended to increase earnings from more stable activities. These transformations are ongoing and their success has yet to be tested. In addition, these firms may face remaining risks from run-off legacy or acquired portfolios, or from noteworthy exposure to the euro area debt crisis. Firms in this group now have standalone credit assessments of baa3. Their deposit ratings are A3 at the operating company level. Their holding companies, where they exist, have senior debt ratings between Baa1 and Baa2. Their short-term ratings are Prime-2 at both the operating and holding company level. Moody’s has today published a special comment titled "Key Drivers of Rating Actions on Firms with Global Capital Markets Operations" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143246), which provides more detail, including the rating rationale for each firm affected by today’s actions. Please refer to the following webpage for additional related announcements: http://www.moodys.com/bankratings2012 RATINGS RATIONALE – SENIOR DEBT AND DEPOSITS Moody’s systemic support assumptions for firms with global capital markets operations remain high, given their systemic importance, and have not been a key driver of today’s rating actions. While Moody’s recognizes the clear intent of governments around the world to reduce support for creditors, the policy framework in many countries remains supportive for now, not least because of the economic stress currently stemming from the euro area and the potential systemic repercussions of large, disorderly bank failures and the difficulty of resolving large, complex and interconnected institutions. However, reflecting the view that government support is likely to become less certain and predictable over time, Moody’s has assigned negative outlooks on certain supported ratings of entities affected by today’s actions, particularly at the holding company level, as discussed in detail in the firm-specific summaries below. Moody’s view on support considers efforts by policymakers globally to create resolution and bail-in regimes that allow for more flexible and limited support in a stress scenario. RATINGS RATIONALE — SUBORDINATED DEBT AND HYBRIDS In addition, Moody’s has today downgraded the subordinated debt and hybrid ratings of the firms whose senior debt ratings have been repositioned. The downgrades reflect the revised senior debt ratings and, in some cases, also the removal of systemic support assumptions from subordinated debt classes. In Moody’s view, systemic support in many countries is no longer sufficiently predictable and reliable going forward to warrant incorporating systemic-support driven uplift into these debt ratings. RATING IMPLICATIONS FOR SOME SUBSIDIARIES WILL BE ASSESSED SEPARATELY Moody’s has also today taken rating actions on a number of subsidiaries and legal entities of firms with global capital markets activities, as summarized below. However, for some other subsidiaries of firms included in today’s announcement, Moody’s will separately assess the impact of their parents’ reduced credit strength.with significant global capital markets activities. This position reflects (i) a relatively high proportion of revenues and earnings from, and a clear commitment to, the global capital markets business; (ii) the large absolute size of the bank’s wholesale funding requirements; and (iii) relatively high historical earnings volatility. These factors are partly mitigated by (i) the stable stream of earnings from the bank’s wealth management and Swiss banking businesses; (ii) a highly pro-active approach to risk management; (iii) a sound structural liquidity profile and strong liquidity risk management; (iv) an improving capital position that is expected to result in lower leverage and capital ratios above the average for the bank’s peers; and (v) resilience to the weak operating environment in Europe, given low exposures to peripheral Europeand Switzerland’s perceived safe-haven status among investors. The stable outlook on Credit Suisse’s ratings reflects the view that capital markets-related risk factors have now been fully incorporated into the bank’s ratings. Given the bank’s high ratings compared with those of most of its global capital markets peers, Moody’s does not expect significant upward pressure on the bank’s ratings absent a significant reduction in the bank’s reliance on earnings from its capital markets business. Any indications of control failures, a marked increase in risk appetite, a significant decline in the Swiss economy or deterioration in capital levels would lead to downward pressure on the ratings. |
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New York, June 21, 2012 — Moody’s Investors Service today repositioned the ratings of 15 banks and securities firms with global capital markets operations. The long-term senior debt ratings of 4 of these firms were downgraded by 1 notch, the ratings of 10 firms were downgraded by 2 notches and 1 firm was downgraded by 3 notches. In addition, for four firms, the short-term ratings of their operating companies were downgraded to Prime-2. All four of those firms also now have holding company short-term ratings at Prime-2. The holding company short-term ratings of another two firms were downgraded to Prime-2 as well.