Several trends are currently weakening the credit profiles of many rated banks globally, according to Moody’s Investors Service. These trends include (i) deteriorating sovereign creditworthiness, particularly in the euro area; (ii) elevated economic uncertainty; and (iii) elevated funding spreads and reduced market access at a time when many banks face large debt maturities.
In advanced economies, these factors are expected to lead to many banks experiencing downward migration of their standalone credit assessments and their debt and deposit ratings in 2012. In the short-term, these pressures will primarily affect the ratings of global capital markets intermediaries (the largest firms trading securities and derivatives) and, in Europe, other banks exposed to financial market disruption. Moody’s expects to place the ratings of a number of these banks under review for downgrade during first-quarter 2012, in order to assess the effect of these trends on bank credit profiles.
Although Moody’s also notes positive factors, such as the accommodative stance of central banks in advanced countries and the strengthened regulation designed to make banks safer, the positive trends are overshadowed by the aforementioned negative credit factors, in Moody’s opinion.
“The expected decline of bank ratings reflects the acceleration of interrelated pressures on the banking sector since the second half of 2011,” says Moody’s Global Banking Managing Director Greg Bauer. “These pressures most immediately affect global capital markets intermediaries and European banks.” In contrast, the credit profiles and ratings of banks operating in more stable environments and of banks with strong, retail-oriented business and funding profiles, will be less affected. However, despite some banks being less affected, Moody’s acknowledges that the highly interconnected financial markets and economies imply elevated uncertainty for all banks, even those banks that have shown resilience thus far.
Most European banks are vulnerable to the euro area debt crisis that reflects eroding investor confidence and a weakening regional economy. Moody’s concerns center on the ability of many European banks to retain the confidence of investors and counterparties and to fully refinance substantial 2012 term debt maturities. To reflect these challenges in ratings, Moody’s will further emphasize the forward-looking elements of its bank rating methodology, increasing the weight given to estimates of bank solvency under anticipated and stressed scenarios, and adjusting its views on the operating environment, franchise value, risk positioning and financial fundamentals for vulnerable banks. As a consequence, the standalone credit assessments and ratings for many European banks will likely decline.
Global capital markets intermediaries face macroeconomic uncertainty, low growth and severe market volatility. These factors, combined with regulatory restrictions and intense revenue pressure add to existing credit challenges for these firms, such as interconnectedness, complexity and opacity of risk profiles. As a result, Moody’s expects to lower its standalone credit assessments of many global capital markets intermediaries, including the standalone credit assessments of broader-based banking groups with significant capital markets operations. The long-term and in some cases potentially short-term, debt and deposit ratings of these institutions will likely also be affected.
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