World’s Largest Banks Face Credit Ratings Review In 3 Weeks

By: EW News Desk Team   Date: 18 November 2011

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EW News Desk Team

Always on the look out for the latest news to monitor the state of the world economy.

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18 November 2011

Major credit rating agency Standard & Poor’s is set to update the credit ratings status for the world’s 30 largest banks within the next 3 weeks, with numerous high-profile banks believed to be extremely susceptible to a potential downgrade, said a report by Reuters on Friday.

According to CreditSights Inc analyst Baylor Lancaster, the most vulnerable financial institutions include Bank of America Corp, Citigroup Inc and Morgan Stanley. European banks are also expected to be on high alert, after S&P downgraded its scores for banking industries across numerous eurozone nations on November 9.

Related: Takeover Turmoil: Problems Pile Up For The Bank of America

Related: Europe’s Old Bank Business Models Are Obsolete: Gene Frieda

The latest update is said to be part of a major overhaul by S&P of its credit scoring system, after the agency was stung by criticism over its apparent role in the lead-up to the 2008 financial crisis.

Back then, all of the 3 major credit rating agencies had been accused of giving overly positive ratings for mortgage-backed securities and financial institutions, which eventually led to the housing bubble burst.

"They are trying to rectify some of the problems that they have had in the past and to the extent that they do that, it is good," said John Croft, a portfolio manager and director of investment grade research at Eaton Vance.

Related: Appetite For Self-Destruction: Have Rating Agencies Lost The Plot?

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Related: Ten Things You Probably Don't Know About Credit Rating Agencies

The push by S&P to upgrade its methods is also seen as a response to the decision by its parent company, McGraw-Hill Cos Inc, to divide itself into two separately listed companies.

Although S&P is said to have already started preparing companies and markets over its imminent changes, analysts believe that some banks could be in for a surprise once the updates are complete.

"One reason there could be surprises is that the new ratings method is very complex and it has been very difficult to simulate results," said Beate Muenstermann, a London-based research analyst for the money management arm of JPMorgan Chase & Co.

Earlier this month the agency published its final criteria for its update and said it expects 60 percent of all bank ratings to stay as they are, while 20 percent will go up by one grade, with 15 percent expected to fall by one grade and a further 5 percent to drop by two or more grades.

The world’s 30 largest banks though could be in store for as many of them are based in Western economies that have been heavily affected by the ongoing financial crisis.

Related: The Blame Game: If The Banks Didn’t Cause The Financial Crisis, What Did?

Related: Banking’s Biggest Dilemma – Stability or Competition? : Xavier Vives

S&P intends to announce its results for the 30 biggest banks first, before quickly rolling out its ratings for other smaller banks. Still, the update may not be all bad news for banks as changes in credit rating methods have often signalled a coming upturn for banks.

“Historically, ratings agencies tend to change their methodologies after large downward price movements in the market,” said Ryan Brist, a portfolio manager at Western Asset Management.


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