Banks and global securities firms are likely to see their credit ratings come under pressure as they face several trends that are weakening their credit profiles, says Moody’s Investors Service in a new report.
The rating agency says it expects to place the ratings of a number of the banks and other financial firms under review for downgrade during the first quarter of 2012, in order to assess the effect of these trends.
The trends impacting bank credit profiles include deteriorating sovereign creditworthiness, particularly in the euro area; heightened economic uncertainty; and, elevated funding spreads and reduced market access at a time when many banks face large debt maturities.
Moody’s says that, 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, European banks that are exposed to financial market disruption.
The rating agency notes that positive factors, such as the accommodative stance of central banks in advanced countries, and the strengthened regulation designed to make banks safer, but that these positive trends are overshadowed by the negative credit factors.
“The expected decline of bank ratings reflects the acceleration of interrelated pressures on the banking sector since the second half of 2011,” says Greg Bauer, Moody’s global banking managing director. “These pressures most immediately affect global capital markets intermediaries and European banks.”
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, Moody’s says. Nevertheless, it points out that highly-interconnected financial markets and economies imply elevated uncertainty for all banks, even those banks that have shown resilience so far.
For European banks, which 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, Moody’s says its ratings 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,” it says.
As for global capital markets intermediaries, Moody’s notes that they are facing macroeconomic uncertainty, low growth and severe market volatility, along with regulatory restrictions and intense revenue pressure, which add to existing their credit challenges, such as interconnectedness, complexity and the opacity of their 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 ratings of these institutions will likely also be affected, it says.