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Some of the largest financial institutions had their long-term credit ratings cut by Moody's, but the impact on their cost of funding is unclear.
Andrew Sawers, CFO.com | US
June 22, 2012
Moody's Investors Service cut the long-term credit ratings of 15 banks in North America and Europe on Thursday, possibly making it tougher for them to access capital and borrow cheaply. But analysts disagreed on how severely the downgrades would affect the banks' costs of funding.
Still, the downgrades could be a significant blow to some financial institutions. The credit ratings of Bank of America, Morgan Stanley, and Citigroup, for example, brought them closer to the lowest level that still counts as investment grade.
And Moody's actions left only five of the major European banks and one Canadian bank with "stable" outlooks: Credit Suisse, Royal Bank of Canada, BNP Paribas, UBS, Société Générale, and Deutsche Bank. (The other nine, including all five U.S. banks reviewed, were tagged "negative outlook" by the ratings firm.)
Moody's global banking managing director Greg Bauer said in a statement that all 15 of the global banks faced "significant exposure to the volatility and risk of outsized losses inherent to capital markets activities." But some analysts said the downgrades were also motivated by the need to portray the credit quality of these global banks more accurately.
"In reality this is just a readjustment by the agency of ratings that were clearly wrong . . . they [implied] too much government support in the current environment," wrote CreditSights analysts in a report on Friday.
CreditSights analysts also said that overall, the downgrades would not have a material impact on funding costs. "Ratings are much less influential than they used to be — although the downgrade of some short-term ratings to P-2 [one notch below the best rating for commercial paper] will further restrict banks' access to short-term funding markets," the report noted.
Christopher Whalen, senior managing director of Tangent Capital Partners, says the impact could be substantial. Counterparties of these major banks will have to "begin pricing ratings risk into their credit limits for these institutions," he says.
Because credit ratings are still "hard-wired" into investment mandates, debt contracts, and some regulatory regimes, said CreditSights, downgraded banks, to varying degrees, will also probably have to post collateral against derivatives and bond contracts. "This is not a serious inconvenience given banks' high levels of liquid assets, but it will add to the pressure on their profitability," according to the independent credit-market research firm.
Credit Suisse suffered the biggest cut of the 15, a three-notch downgrade from Aa1 to A1. (From lowest credit risk to highest, Moody's ratings are Aaa, Aa, A, Baa, Ba, B, and so on. The lower the number the higher the quality of the credit within its ratings category.) The Swiss National Bank said last week that Credit Suisse needed to raise more capital.
There had been expectations that Morgan Stanley would be cut three levels to Baa2, but the investment bank received only a two-notch cut. "The maximum downgrade would have had potential knock on impacts to [its] market share as [its rating] would have been below [its] closest peers," wrote RBC Capital Markets's analyst Gerard Cassidy in a report.
HSBC looks like the winner — or the bank that lost least — among the big European financial institutions. The London-based bank's long-term rating was cut by just one notch, from Aa2 to Aa3.
BNP Paribas, Crédit Agricole, UBS, Deutsche Bank, Barclays, and Royal Bank of Canada were all cut by two notches, from Aa3 to A2, and Société Générale lost one notch, to A2. Royal Bank of Scotland was cut one grade, to Baa1.
Moody's has taken a number of actions on the ratings of European banks in the past few weeks, leaving the region with very few banks that rate A2 or higher, said CreditSights.
In the United States, JP Morgan Chase was cut two notches, from Aa3 to A2, and Goldman Sachs fell two rungs, to A3.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.