Business

Published: Friday June 22, 2012 MYT 7:12:00 AM
Updated: Friday June 22, 2012 MYT 7:29:13 AM

Moody's cuts ratings of 15 global banks: What should they do?(update)


NEW YORK: Moody's Investors Service cut the credit ratings of 15 of the world's biggest banks on Thursday in an expected move that was part of a broad review of major financial institutions.

Moody's announced the review on Feb. 15, saying these global investment banks' ratings did not capture the evolving challenges of more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions.

"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," Moody's Global Banking Managing Director Greg Bauer said in a statement.

Among the moves, Moody's cut JPMorgan's longterm senior to A2 from Aa3 and assigned it a negative outlook.

It also cut Morgan Stanley's longterm senior unsecured debt o nly two notches to Baa1 from A2 and also assigned it a negative outlook.

In February Moody's had said Morgan Stanley could be cut by up to three notches.

Morgan Stanley had been viewed as the U.S. bank that could suffer the most from a Moody's downgrade, because of its relatively large trading operation and because of the extent of the cut that Moody's threatened.

BANK REACTIONS: UBS:

"We are pleased that they have acknowledged that we have made significant progress in adapting to changes in the regulatory and capital markets environment and that UBS has a strong capital position and capital targets well above its peers, a healthy balance sheet, and limited exposure to the sovereign debt of European countries rated AA and below. Our liquidity position remains strong, and our funding position is conservative, with sources that are diversified by market, product and currency."

RBC SPOKESWOMAN KATHERINE GAY:

"We remain one of the strongest and one of the highest rates banks in the world across a number of categories. We don't expect any impact on our clients and minimal impact on our business."

MORGAN STANLEY:

"While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years. However, their acknowledgment of our longterm partnership with MUFG as well as our industryleading capital and liquidity highlight some of the transformative steps we have taken. With our derisked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."

CREDIT SUISSE SPOKESWOMAN VICTORIA HARMON:

"We are better rated than all but two banks."

GOLDMAN SACHS SPOKESMAN DAVID WELLS:

"We believe our strong credit profile and unique mix of attractive, highreturn businesses with an institutional client focus will continue to serve our shareholders, creditors and clients well."

CITIGROUP:

"Citi strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted. Moody's approach is backwardlooking and fails to recognize Citi's transformation over the past several years, the strength and diversity of Citi's franchise, and the substantial improvements in Citi's risk management, capital levels and liquidity."

ROYAL BANK OF SCOTLAND:

"The Group disagrees with Moody's ratings change, which the Group feels is backwardlooking and does not give adequate credit for the substantial improvements the Group has made to its balance sheet, funding and risk profile. Nonetheless, the Group believes the impacts of this downgrade are manageable, bearing in mind its £153 billion liquidity portfolio. The amount of collateral that may have to be posted following this one notch downgrade by Moody's is estimated to be £9 billion as of 31 May 2012. The Group continues to maintain a solid liquidity and funding position. RBS has completed its planned wholesale funding requirements for 2012."

BNP PARIBAS:

"This rating action was anticipated as Moody's placed BNP Paribas on review for possible downgrade of up to two notches on 15 February 2012. This is part of a wider action where Moody's placed a number of European banks and institutions with global market activities on review for possible downgrade."

"BNP Paribas notes that Moody's recognises the strength of its universal bank model and very strong retail and commercial franchises across a variety of product lines and geographies. Nevertheless, BNP Paribas thinks that the following important elements have not been sufficiently taken into consideration by Moody's:"

"BNP Paribas' deleveraging plan, which is now almost completed, and will allow it to be one of the very few banks with a fully loaded Basel 3 CET1 ratio of 9% at end2012."

"Its strong liquidity profile, with 201bn liquid asset reserve immediately available as at 31 March 2012, amounting to roughly 100% of its shortterm wholesale funding, and 51bn excess of stable resources against customer funding needs."

"BNP Paribas' very good resilience through the crisis, strong solvency, and consistently cautious risk policy make it one of the most solid banks in the world."

"BNP Paribas is rated AA by S&P and A+ by Fitch, making it one of the best rated banks according to those well respected rating agencies."

INVESTORS AND ANALYSTS:

MARK GRANT, MANAGING DIRECTOR AT SOUTHWEST SECURITIES INC:

"The biggest surprise is the threenotch downgrade of Credit Suisse, which no one was looking for. In fact, it was Morgan Stanley that was supposed to be downgraded by that amount and Morgan received only two notches of cuts."

"Overall, the cost of funding for banks is going to be higher. It will be more difficult to execute complex trades and you will see counterparty risk allocations curbed. I wouldn't by any bank stocks or any stocks, for that matter, here. I would buy senior debt of banks because spreads are very wide and that represents good opportunity so long as you stay 'senior' in the capital structure."

BILL SMEAD, CIO AT SMEAD CAPITAL MANAGEMENT:

"We spend all of our time closing barn doors. The animals are already out of the barn."

JOHN BRYNJOLFSSON, MANAGING DIR. OF HEDGE FUND ARMORED WOLF:

"We don't consider this alarming news at all. We are in the midst of a global bank delevering, capital building effort of global financial institutions. With zero percent money rates in the U.S., lowering rates globally, liquidity pumping globally, and capital outside of banks, on sidelines, the question is 'When will it be safe to go back in the water?' Investors have been burned by false starts, and quick trigger fingers too often."

SUSANNA GIBBONS, VICE PRESIDENT, PORTFOLIO MANAGER FOR FIXED INCOME, RBC GLOBAL ASSET MANAGEMENT:

"At first glance it looks a little better than people's worst fears, so that's a positive. Morgan Stanley, I think, was the big question. We were worried about a threenotch downgrade and they were downgraded two notches. It looks like nobody was taken down more than expected so that's good. It was fine and certainly within expectations. It puts some of the worst fears to bed. Now that this is behind us and it's not the worst expected I'd say that's a positive for the market."

ERIC FINE, PORTFOLIO MANAGER AT VAN ECK GLOBAL: "One of the most anticipated events in the latest market cycle and I think the two notches on Morgan Stanley is less bad than the worst case which was being increasingly discounted. Because this was so anticipated and now effectively over, if there were no broader issues this would most likely be a relief moment. However the so far unresolved European crisis and more broadly the lack of a serious longterm fiscal policy fix in the U.S. will both remain weights on the market."

What should the 15 global banks do now that Moody's has cut their credit ratings?

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Antony Currie

NEW YORK: What should the 15 global banks do now that Moody's has cut their credit ratings? Go out and borrow money as quickly as possible is what.

In times past, that might have seemed rash. After all, a debt downgrade is supposed to mean borrowing costs go up.

And most of the banks affected probably don't need the cash. But jumping back into the markets quickly is the best way to show up Moody's.

For starters, the rating agency is pretty late to the party, despite the nailbiting attention given its decision.

Rivals Fitch and Standard&Poor's concluded their reviews last year. Bondholders, however, took action long before that: they're demanding higher interest rates from virtually all large financial institutions before lending to them.

Morgan Stanley , for example, is paying about 3.9 percentage points above U.S. Treasuries for fiveyear paper, far more than before the crisis.

And that's after banks were forced to restructure their balance sheets to reduce risks. Leverage is down and common equity is up. Meanwhile, most have already addressed other weak points exposed by the crisis.

There's much less reliance on commercial paper, at least among U.S. banks. Morgan Stanley, Goldman Sachs and Bank of America have none, for example. And many have removed any linkage of repo funding to ratings.

Even where the actions by Moody's might have an effect, only the woefully unprepared should feel much pain. Morgan Stanley, for example, will have to post as much as $6.7 billion in extra collateral after its twonotch downgrade left it at Baa1.

With almost $180 billion in excess liquidity, that's hardly a problem. Like its peers, it also means the bank isn't desperate to raise more cash. What's more, Morgan Stanley has spent the time since Moody's announced its review in February restructuring or renegotiating most of the derivatives contracts that could be hit by the downgrade.

Even the surprises from Moody's look manageable. Credit Suisse was whacked by three notches, though still remains a solid Arated credit. So, what better way to shrug off the news than to head into the market and sell some bonds? - Reuters

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