Bank ratings under the spotlight

The local stock market gave more prominence than it deserved to Moody's Investor Service's rating outlook change to negative on three of the big four banks, and used it as an excuse for yet another sell-off. The change to a negative outlook on the 'B' bank financial strength and 'Aa1' long term ratings assigned to Australia and New Zealand Banking Group, Commonwealth Bank of Australia and Westpac Banking Corporation, reflected the potential for the global economic downturn to have a protracted impact on asset quality and earnings and was a statement of the obvious.

Moody's was also keen to point out that even in a severe downside scenario, the Australian banks would be expected to remain solidly positioned within the 'Aa' rating band and recent increases in capital and improvement in funding and liquidity profiles were noted. And with 'AA' and 'AA/AA-'' long- term debt ratings from Standard & Poor's and Fitch Ratings respectively, the big four Australian banks remain among the most highly rated banks in the world.

Moody's had a particular focus on banks last week as it also pursued rating actions on Wells Fargo, JPMorgan Chase, Bank of America, St George Bank, Suncorp-Metway, Westpac Europe and Investec Bank Plc.

Prompted by concern that Wells Fargo's capital ratios could deteriorate in 2009 from
their current levels because of the potential need to take high loan loss provisions in 2009, Moody's placed the 'Aa3' senior debt rating on Wells Fargo & Company and the 'Aa1' long term deposit and 'B' bank financial strength ratings on Wells Fargo Bank on review for possible downgrade. The review is expected to be concluded by the end of this month with a multi-notch downgrade of the bank financial strength rating likely.

The same concerns led to the outlook on the 'Aa3' rating on JP Morgan Chase's senior debt and on the bank's 'Aa1' long term deposit and 'B' bank financial strength ratings, being amended to negative.

Similarly, Bank of America Corp and Bank of America N.A. had their 'A1' and 'Aa2' senior debt ratings respectively, and the 'B-'' financial strength rating assigned to the bank, placed on review for possible downgrade. As with Wells Fargo, the review is expected to be concluded by the end of this month with a multi-notch downgrade of the bank financial strength rating is likely.

On the same day, S&P lowered its ratings on Bank of America Corp and the bank again, after having last lowered the ratings in December. S&P said that economic weakness is persisting and the consequent pressure on earnings will be more intense than it had previously anticipated.

The long- term debt rating on Bank of America Corp. was lowered to 'A' from 'A+', while the long and short term ratings for the bank were lowered to 'A+/A-1' from 'AA-/A-1+'. The outlook on all ratings is negative.

St George had its bank financial strength rating lowered to 'B-'' from 'B', to reflect its expected financial profile, completing a review for possible downgrade initiated when Westpac completed its acquisition of St George in December. The rating was left with a stable outlook but the outlook on the 'Aa1' long term deposit and debt rating
assigned to St George was amended to negative, consistent with Westpac's outlook change.

Suncorp-Metway's long- term deposit and debt rating was lowered to 'A1' with a stable outlook, from 'Aa3', and its bank financial strength rating lowered to 'C+' from 'B-'' and left with a negative outlook. The downgrade of the deposit and debt rating reflects the impact of the deepening global economic downturn on the bank's asset quality and earnings, while the strong support the Australian government is extending to the banking system is reflected in the stable outlook.

The BFSR continues to carry a negative outlook in line with the broader banking system, reflecting the continuing stresses on the bank as well as the higher frequency of catastrophic losses currently weighing on the insurance business.

With the change to a negative outlook on Westpac's key ratings, Moody's placed the 'Aa1' long term rating assigned to Westpac Europe Limited on review for possible downgrade. Moody's is concerned about APRA's willingness to permit support provided by Westpac to flow to its offshore subsidiaries, such as Westpac Europe.

In response to current rends in the operating environment putting significant pressure on the financial fundamentals of the group, Moody's lowered the long term deposit and bank financial strength ratings assigned to Investec Bank Plc to 'Baa3' from 'Baa1' and to 'D+' from 'C-'', respectively. Moody's also lowered the long and short term debt ratings assigned to the holding company, Investec Plc, to 'Ba1/NP' from 'Baa2/P-2'.

Subsidiary, Investec Bank (Australia) Limited, recently issued $600 million of Australian government guaranteed bonds but it also has a further $100 million and $150 million of June 2010 and June 2012, non-guaranteed bonds, on issue.     
Poor 2008 results for the enlarged Lloyds Banking Group and the prospect of weaker than expected earnings and asset quality in 2009 caused S&P to lower its long- term rating on the holding company to 'A' from 'A+'. S&P also reduced its long- and short- term ratings on Lloyds TSB Bank Plc and Bank of Scotland Plc to 'A+/A-1' from 'AA-/A-1+'. All ratings have a stable outlook.

Consideration of the possible implications of Northern Rock's planned legal and capital restructuring, announced on February 23, has led S&P to place its 'A/A-1' credit ratings on CreditWatch with negative implications.

S&P and Moody's both lowered their ratings on HSBC Finance Corp. after the company announced a US$1.8 billion pre-tax loss in the fourth quarter of 2008, along with the discontinuation and winding down of its US consumer lending business. S&P lowered its counterparty credit ratings to 'A/A-1' from 'AA-/A-1+' and assigned a negative outlook. With all but the credit card business being in run-off mode, S&P no longer considers HSBC Finance Corp to be a core member of the HSBC group but now designates it as being "strategically important".

Moody's lowered its long- term debt rating to 'A3' from 'Aa3' but left the rating with a stable outlook. Moody's commented on the now "non-strategic" position of HSBC Finance  Corp. in the HSBC group but noted HSBC's public statement that it will provide all necessary support to the company so that it can wind down its receivables portfolio and pay off its debt in a measured way over time. HSBC Finance Corp. has $1 billion of September 2011 bonds outstanding in the domestic market.

Fitch downgraded SNS Bank's long- term issuer default and individual ratings by one notch to 'A' and 'C', respectively. The issuer default rating on the parent, SNS REAAL, was also lowered a notch to 'BBB+'. The outlook on the ratings is negative.
The protracted turmoil in the financial markets and the continuing decline of the global economy led to a consolidated net loss of €EUR504m for the full year for SNS REAAL and this is expected to continue in 2009. There has also been a notable deterioration in the profitability of the group's insurance operations.

SNS Bank has some $925 million of bonds outstanding in the domestic market with maturities ranging from December 2009 to November 2011.