Fitch Reviewing Global Trading and Universal Banks, Places Seven on Rating Watch Negative
Location: New York
Author: Brian
Bertsch
Date: Monday, October 17, 2011
In conjunction with a broad assessment of the ratings for the largest
banking institutions in the world, Fitch Ratings is conducting a review
of the global trading and universal banks in its rating portfolio. As
part of that review, Fitch has placed the Viability Ratings (VRs) of
seven and the long-term Issuer Default Ratings (IDRs) of six global
trading and universal banks on Rating Watch Negative. At the same time,
Fitch has placed the short-term IDRs of four of the banks on Rating
Watch Negative.
The banks impacted by these rating actions are as follows:
--Barclays Bank plc
--BNP Paribas
--Credit Suisse AG
--Deutsche Bank AG
--The Goldman Sachs Group, Inc.
--Morgan Stanley
--Societe Generale
Fitch expects to resolve the Rating Watch Negative within a short time
frame and to take corresponding rating actions where warranted.
A list of each bank's key impacted ratings follows at the end of this
release. Full lists of impacted ratings are contained in the individual
rating action commentaries on each of these firms, which are available
at 'www.fitchratings.com'.
Barclays Bank plc's rating action was addressed earlier today; for
details see 'Fitch Lowers UK Support Rating Floors; Downgrades Lloyds,
RBS to 'A''.
Fitch expects that any downgrades of these banks' VRs would in most
cases be one notch and at maximum two notches. Most actions on the
long-term IDRs will be limited to one notch as IDRs will not fall below
the banks' Support Rating Floors when applicable. Short-term IDR
implications will also likely be a one-notch downgrade for those banks
whose ratings are on Rating Watch Negative. It also possible that
certain banks could have their ratings affirmed at current levels. Fitch
also expects that many of these ratings should revert to Stable Outlooks
upon resolution of the Rating Watches.
The resolution would be based on the conclusion of Fitch's review of the
issuers. Fitch expects to engage with the issuers and review any new or
additional information that is relevant to their ratings. Fitch will
also consider the absolute and relative ratings of each issuer put on
Rating Watch today in the context of other global financial
institutions.
The placement on Rating Watch Negative of these global trading and
universal banks' VRs reflects Fitch's view that these institutions'
business models are particularly sensitive to the increased challenges
the financial markets are facing. These challenges result from both
economic developments, particularly in the euro area, as well as a
myriad of regulatory changes.
Fitch also notes that these actions are not tied to any specific
earnings information as this review has been ongoing for some time. The
review is motivated by Fitch's evolving concerns about aspects of these
business models and the structural challenges they face, particularly
during periods of market stress.
However well-managed, the structural aspects of their funding, earnings,
and leverage, predispose trading and universal banks to greater
vulnerability to market sentiment and confidence, particularly during
periods of exogenous financial stress. Furthermore, the complexity of
their business models and exposure to fat tail risk make it more
difficult to assess the size of loss that could emerge rapidly from
unexpected events.
These seven banks are among the largest global trading and universal
banks. Trading businesses exhibit high reliance on short-term wholesale
funding and to varying degrees what Fitch views as more volatile
earnings than commercial banking, and with more opaque risk. These
factors drive Fitch's expectation of more robust liquidity and higher
capital than commercial banks to retain ratings in the single 'A' range.
Fitch considers it highly unlikely for a bank whose business model is
strongly weighted to trading operations to remain in the 'AA' range, and
any universal bank rated in that range would have to maintain
particularly strong levels of retail funding, liquidity and capital. The
seven banks remain highly rated firms that largely have strong credit
profiles.
While Fitch considers dependence on trading activity and particularly
volatile trading activity to differ among this group of banks, it is
also Fitch's view that a number of additional factors need to be taken
into the balance. Among these, Fitch looks at the dominance of a bank's
position in various markets, track records established in each business
and barriers to entry and specific challenges facing the commercial
banking arms of universal banks. Given the complexity of the business,
the degree of transparency achieved in external reporting is also an
important factor in Fitch's rating assessment.
Fitch recognizes that these institutions are diverse both in terms of
product scope and geography and are among the largest in the world.
However, recent history demonstrates that large banks can fail.
Furthermore, diversification can have both positive and negative
implications. Fitch believes that it is the tendency for asset
correlations to converge during times of stress, as witnessed during the
2008 financial crisis. While this is not a new discovery, Fitch believes
it is still important to highlight in the context of this rating
comment.
Importantly, Fitch also recognizes that individual firms demonstrate
varying degrees of resiliency to these concerns, which is driven in part
by such key intangible factors as corporate governance, management depth
and experience, risk management culture, and so forth. Fitch will
continue to weigh these factors in its assessments.
Fitch's rating review includes a broader base of global trading and
universal banks. Fitch believes that the institutions placed on Rating
Watch Negative are more susceptible to rating downgrades because of
their relative sensitivity to the rating attributes outlined above and
their relatively high current ratings. Also, some of these banks face
challenges from developments in the euro area.
Fitch has taken no action on Citigroup, Inc.'s and JPMorgan Chase &
Co.'s VRs, Long-term IDRs and Short-term IDRs. Rating actions on IDRs of
UBS AG and The Royal Bank of Scotland plc were taken as a result of
revisions to the Support Rating Floors. (Please refer to 'Fitch Comments
on Support for Euro Banks; Takes Various Support-Driven Actions' dated
Oct. 13, 2011 and the individual issuer commentaries for additional
details.) The VR of Bank of America Corporation was also placed on
Rating Watch Negative as part of this broader review, and additional
ratings drivers are discussed in its individual issuer commentary.
Fitch highlights that other firms are not immune to these challenges,
and many other financial institutions, particularly in the euro area
have also been subject to negative rating actions by Fitch this week.
For more details on Fitch's European rating actions, please refer to the
following releases:
--'Fitch Takes Rating Actions on Major Spanish Banks Following Sovereign
Downgrade', Oct. 11, 2011;
--'Fitch Takes Rating Action on Major Italian Banks Following Sovereign
Downgrade', Oct. 11, 2011;
--'Fitch Comments on Support for Euro Banks; Takes Various
Support-Driven Rating Actions', Oct. 13, 2011;
--'Fitch Places Five Major European Commercial Banks on Rating Watch
Negative', Oct. 13, 2011.
Furthermore, Fitch acknowledges that many of these global financial
institutions demonstrate stronger fundamental financial metrics than
they had preceding the start of the financial crisis in 2008, and some
have lower ratings than they did at the time.
Nevertheless, Fitch considers the potential for these negative rating
actions to be warranted by the structural challenges these firms'
business models face. These challenges stem from intensified regulation,
heightened funding costs, intense competition to remain a top tier
player, and changing risks in an industry of constant and rapid
innovation and interconnectedness with developments in the rest of the
industry and the global economy.
For additional perspective see the individual rating action commentaries
for each of these institutions and the report 'Rating Banks in a
Changing World', dated Oct. 13, 2011.
Fitch has placed the following ratings on Rating Watch Negative:
Bank of America Corporation
--Viability Rating (VR) 'a-'.
Barclays Bank plc
--Viability Rating 'aa-';
--Long-term IDR 'aa-';
--Short-term IDR 'F1+'.
BNP Paribas
--Viability Rating 'aa-';
--Long-term IDR 'aa-'.
Credit Suisse AG
--Viability Rating 'aa-';
--Long-term IDR 'aa-';
--Short-term IDR 'F1+'.
Deutsche Bank AG
--Viability Rating 'aa-';
--Long-term IDR 'aa-'.
The Goldman Sachs Group, Inc.
--Viability Rating 'a+';
--Long-term IDR 'a+';
--Short-term IDR 'F1+'.
Morgan Stanley
--Viability Rating 'a';
--Long-term IDR 'a';
--Short-term IDR 'F1'.
Societe Generale
--Viability Rating 'a+'.
Additional information is available at 'www.fitchratings.com'.
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