Royal Bank of Canada (RBC) has been downgraded by Moody’s Investors Service as part of a series of downgrades of 15 financial firms with significant global capital markets exposure.
“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 rating actions conclude a review that Moody’s began in February after reassessing 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, it notes.
Moody’s divided the affected firms into three groups, lumping RBC with HSBC and JPMorgan. It says these firms have significant capital markets operations and risks, however they also have stronger buffers 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, it says. Also, capital and structural liquidity are sound for this group, Moody’s says, and their direct exposure to stressed European sovereigns and financial institutions is contained.
The second group of firms includes Barclays, BNP Paribas, Credit Agricole SA (CASA), Credit Suisse, Deutsche Bank, Goldman Sachs, Societe enerale and UBS. Many of these firms rely on capital markets revenues to meet shareholder expectations, Moody’s notes, and capital markets operations constitute a large part of their overall franchises.
The third group of firms includes Bank of America, Citigroup, Morgan Stanley, and Royal Bank of Scotland. Moody’s says that 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 these firms are changing their risk management or business models to limit risk, but these transformations are ongoing and their success has yet to be tested, the rating agency notes. Additionally, these firms may face remaining risks from run-off legacy or acquired portfolios, or from noteworthy exposure to the euro area debt crisis, it says.