Fitch Ratings has downgraded the issuer viability ratings (VR) of eight Global Trading and Universal Banks (GTUB) banks and affirmed one. The banks were placed on Rating Watch Negative on October 13, 2011.
Fitch said the impact of VR downgrades reflected challenges faced by the sector as a whole, rather than negative developments in idiosyncratic fundamental creditworthiness. The actions were motivated by Fitch’s view that the GTUBs’ business models are particularly sensitive to the increased challenges the financial markets face. These challenges result from both economic developments as well as a myriad of regulatory changes, said the ratings agency. Fitch incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges, which has kept the VR downgrades to one or two notches.
Nonetheless, Fitch continues to be of the opinion that, however well-managed, the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress.
Fitch said that over time market conditions are likely to ease, however, market volatility will remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs, it said.
The following highlights Fitch’s ratings actions:
– Bank of America Corporation - Long-term IDR downgraded to ‘A’ from ‘A+’; - Short-term IDR downgraded to ‘F1’ from ‘F1+’; - Viability Rating downgraded to ‘bbb+’ from ‘a-‘.
– BNP Paribas - long-term IDR downgraded to ‘A+’ from ‘AA-‘; Short-term IDR affirmed at ‘F1+’; - VR downgraded to ‘a+’ from ‘aa-‘.
– Credit Suisse – long-term IDR downgraded to ‘A’ from ‘AA-‘; - Short-term IDR downgraded to ‘F1’ from ‘F1+’; - Viability Rating downgraded to ‘a’ from ‘aa-‘.
– Deutsche Bank -Long-term IDR downgraded to ‘A+’ from ‘AA-‘; - Short-term IDR affirmed at ‘F1+’; - Viability Rating downgraded to ‘a’ from ‘aa-‘.
– Goldman Sachs – Long-term IDR downgraded to ‘A’ from ‘A+’; -Short-term IDR downgraded to ‘F1’ from ‘F1+’; –Viability Rating downgraded to ‘a’ from ‘a+’.
– Morgan Stanley – Long-term IDR affirmed at ‘A’; –Short-term IDR affirmed at ‘F1’; –Viability Rating downgraded to ‘a-‘ from ‘a’.
– Societe Generale – Long-term IDR affirmed at ‘A+’; –Short-term IDR affirmed at ‘F1+’; –Viability Rating downgraded to ‘a-‘ from ‘a+’.
UBS – Long-term IDR affirmed at ‘A’; –Short-term IDR affirmed at ‘F1’; –Viability Rating affirmed at ‘a-‘.
On October 13, 2011 UBS’s IDR was downgraded to ‘A’ from ‘A+’ due to a downgrade of its Support Rating Floor and its VR remained on Rating Watch Negative. Bank of America’s VR was placed on Rating Watch Negative on October 13, 2011.
The rating actions taken were based on Fitch’s assessment of creditworthiness against the relatively high rating levels that the GTUBs previously had.
While regulation enhances creditworthiness of banks generally by forcing them to hold higher capital and liquidity and curbing risk-taking in some areas, it also restricts earnings potential and increases costs, which encourages increasing the scale required to remain efficient and will likely reduce the number of market participants, said Fitch.
Fitch said it remains uncertain which of the GTUBs will emerge as the strongest once the new regulations are fully implemented and business appropriately adjusted, although, the ratings agency views leading market positions across various products and geographies as a good indicator, especially if backed by substantial core capital.
Leading commercial banking or wealth management franchises are also an important consideration for Fitch’s ratings of universal banks. For many of these banks, higher weighting of securities businesses on earnings and risk profiles is a negative factor in their ratings, and establishment of a more balanced business mix could be a positive ratings driver, said Fitch.
Despite the downgrades, Fitch believes the GTUBs are much better placed to deal with difficult market conditions today than in 2008. Capitalization and liquidity are improved and vulnerabilities reduced, it said.
(JDC)