Moody's places banks on review after releasing its new methodology
Moody's Investor Service released its updated bank rating methodology last week and moved quickly to place on review the ratings of those banks likely to be affected by the change.
The majority of rating actions are positive at the senior level, as subordination support for senior debt has been assessed as being more than sufficient to offset diminished government support.
No action has been taken on Australian or New Zealand banks, with the exception of Heritage Bank, which has been placed on review for downgrade.
Among those with bonds outstanding in the domestic market the following are all on review for upgrade: Bank of America, Citibank, Goldman Sachs, HSBC Bank, ING Bank NV, Lloyds Bank, Morgan Stanley, Royal Bank of Scotland, Shinhan Bank, and Volkswagen Financial Services Australia.
On review for downgrade are: Credit Suisse, Deutsche Bank, Deutsche Pfandbriefbank, Heritage Bank and UBS.
Rabobank Nederlands has been placed on review uncertain.
ABN Amro Bank, Bank Nederlandse Gemeenten, Barclays Bank, Credit Agricole, Group BPCE, and Nederlandse Waterschapsbank have experienced positive outlook changes to either stable or positive.
Moody's new methodology involves a two-step process that starts with determining a baseline credit risk assessment and then considers support and structural features to determine the final credit rating assigned.
The baseline credit risk assessment begins with an assessment of a bank's operating environment. This incorporates the country risk of the bank's domicile and the credit conditions, funding conditions and industry structure confronting the bank.
The financial profile of the bank is considered: asset quality, capitalisation, funding and liquidity and profitability. Then qualitative factors such as business diversification, complexity and corporate behaviour are taken into account to arrive at a bank's baseline credit risk assessment.
The support and structural analysis considers the existence of any affiliate support from a larger parent or co-operative group. Consideration is also given to the existence of any legislated bank resolution regime.
Such a regime could impose loses on depositors and/or other creditors such as bond holders, if a bank was to fail. Ratings for different classes of instruments in the capital structure of the bank will reflect the expected loss to instrument holders with ratings notched up or down accordingly, from the baseline credit risk assessment.
If such a regime does not exist, government support for a systemically important bank is considered more likely (or bankruptcy for a non-systemically important bank). The probability of government support could result in rating uplift from the baseline credit risk assessment, depending on the sovereign rating assigned to the government.
Lastly, Moody's has introduced a Counterparty Risk Assessment (CRA) into its analysis. This is not a rating, but an assessment of an issuer's ability to avoid defaulting on certain senior bank operating obligations and other contractual commitments.