Following the introduction of its new methodology for rating new Basel III securities, Moody’s Investors Service has upgraded various issues from five Canadian banks.
Earlier this week the rating agency announced that it had revised its rating methodology for global banks, specifically to facilitate the rating of new types of securities that are being issued in response to the new Basel III capital rules, and other regulatory reforms. At the time, it suggested that the change in methodology could result in one-notch rating upgrades for these sorts of non-viability contingent capital (NVCC) securities.
And, today it announced that it has, in fact, upgraded the ratings of certain NVCCs issued by four Canadian banks: Bank of Montreal, CIBC, Royal Bank, TD Bank, and National Bank. The affected securities were previously rated four notches below each bank’s adjusted baseline credit assessment. Now, Moody’s has decided to move to three notches below the adjusted BCA, resulting in a one-notch upgrade.
“In making this change, we are removing the additional notch to avoid double counting risks related to the non-viability feature and the probability of impairment associated with coupon suspension, which is possible with these securities,” it says.
“Positioning the rating at the bank’s adjusted BCA minus three notches already captures the probability that an impairment associated with coupon suspension could precede the bank reaching the point of non-viability. As a result, the fourth notch is not needed to capture the risk that conversion to equity or principal write-down associated with a contractual non-viability security may occur prior to the bank reaching the point of non-viability,” Moody’s explains.