Banks Shrug Off Moody’s Downgrades

By Sophie Douez

Swiss banks Credit Suisse and UBS have downplayed the move by ratings agency Moody’s to cut their credit ratings, with both maintaining they are better placed than many of their peers.

Overnight on Thursday, Moody’s downgraded 15 banks and securities firms operating in global capital markets as part of a major review initiated in February. Other banks to be downgraded in the widely anticipated action by the ratings agency included Citigroup, Goldman Sachs, Barclays, HSBC and JP Morgan Chase.

Moody’s said in a statement that the downgrades of Credit Suisse and UBS were due in part to its view that Swiss government support could no longer be assumed in relation to the banks’ subordinated debt.

Credit Suisse, which was warned last week about weak capital levels by the Swiss National Bank, was the only bank in the group to suffer a three-notch downgrade on its standalone credit assessment. But its new A1 deposit and senior debt ratings still rank higher than many of its competitors.

Moody’s cited the bank’s “relatively high” proportion of revenues and earnings coming from, and its commitment to, the global capital markets business and the large absolute size of its wholesale funding requirements, as key drivers of the downgrade.

UBS was downgraded two notches from A2 to Aa3 in a reflection of historically high earnings volatility, its large capital markets business and problems in risk management and control “which the bank suffered during the crisis”.

Risk exposure

“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.

“However, they also engage in other, often market-leading business activities that are central to Moody’s assessment of their capital profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.”

In its ratings statement, Moody’s said it had separated subordinated debt – rated at Baa3 for UBS and Baa2 for Credit Suisse – from the standalone credit rating at both banks to reflect the “removal of the assumption of government support for this class of debt at Swiss banks”.

“Moody’s views government support for the subordinated debt of Swiss banks as no longer sufficiently predictable or reliable to warrant incorporating any related uplift to its ratings.”

Analyst at Zurich Cantonal Bank (ZKB) Andreas Venditti said Moody’s assessment of the likelihood or not of Swiss government support resulted from the on-going process to reregulate the so-called too-big-to-fail banks, and the possibility that in the case of huge losses, only the divisions necessary to the Swiss economy may be bailed out and the others syphoned off.

“In the end, in the case of huge losses, some business necessary for the Swiss economy would be taken out of the loss-making business so that you would somehow be able to keep up the payment system to businesses. It’s a recognition that the probability of support is less than it was, although we are clearly not there yet, but we are going in that direction,” Venditti told swissinfo.ch.

Limited impact

Responding to the downgrade, Credit Suisse said the rating change would not materially have an impact on the bank’s liquidity or funding planning, adding that the bank remained one of the best ranked by Moody’s.

“We are pleased that Moody’s continues to recognise Credit Suisse as one of the most highly rated banks in its peer groups, citing our balanced business portfolio, strong liquidity position, improving capital position as well as our low exposure to the peripheral European economies,” Credit Suisse chief financial officer David Mathers said in a statement.

On Friday, the Credit Suisse board of directors said in a statement it was comfortable with the progress that had been made towards meeting the Basel III capital requirements. It added it was “confident that management’s plans will continue to ensure that Credit Suisse Group not only fulfills, but exceeds its regulatory capital requirements”.

UBS said it was disappointed with the Moody’s downgrade but “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”.

Venditti said as the downgrades were not a surprise, they were unlikely to substantially affect either of UBS or Credit Suisse.

“Also because they were not the only ones [to be downgraded] so it becomes a relative game,” Venditti told swissinfo.ch.