S&P Revises Regional Bank Ratings

In yet another round of credit ratings revision, Standard & Poor's (S&P) announced changes in credit ratings for 31 regional banks. The list includes 28 publicly traded parent company banks, a non-public entity Bank of North Dakota and a couple of North American units of European banks.

Some of the banks whose ratings were lowered by S&P included– BB&T Corporation (BBT - Analyst Report), Commerce Bancshares Inc. (CBSH), PNC Financial Services Group (PNC - Analyst Report), U.S.Bancorp. (USB - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report). Ratings for these banks were downgraded by one notch.

However, S&P did not change the ratings of some banks including –First Horizon National Corporation (FHN), First Niagara Financial Group Inc. (FNFG - Snapshot Report), Huntington Bancshares Inc. (HBAN - Analyst Report), KeyCorp (KEY - Analyst Report), M&T Bank Corp. (MTB - Analyst Report), People's United Financial Inc. (PBCT - Analyst Report), Regions Financial Corp. (RF - Analyst Report), SunTrust Banks Inc. (STI - Analyst Report), Synovus Financial Corp. (SNV - Analyst Report) and Zions Bancorp. (ZION). However, only three banks – Associated Banc-Corp (ASBC), Cullen/Frost Bankers Inc. (CFR) and First Republic Bank (FRC) – received upgraded ratings.

Last month, S&P had reviewed the credit ratings of 37 banks. Out of those, it lowered its ratings for 15 banks including many Wall Street giants and a few European banks. 20 of the reviewed banks retained their ratings while two were awarded upgraded ratings.

Reasons for Changes

Though one may think that these ratings revisions are an outcome of weak economic environment and financial institutions’ inability to withstand it, this is not the case.

Actually, the latest alterations in the credit ratings by S&P are mainly based on the criteria modifications that the rating agency has been planning, since the financial crisis in 2008. S&P suffered a bad reputation as it had placed higher ratings on various securities that were backed by subprime mortgages, which did not reflect accurate risk of investments.

Also, it is believed that S&P’s faulty ratings primarily led to the fall of Lehman Brothers Holdings Inc. and Bear Stearns Cos. Hence, in December 2008, S&P started reviewing its rating methodology. Additionally, earlier this year, the rating agency published its proposed criteria and requested feedback from issuers and investors. S&P also announced that it would start publishing revised ratings from the fourth quarter of 2011.

Revised Criterions

S&P’s new methodology to evaluate financial institutions is based on industry and economic risks, company specific strengths and weaknesses, and possibility of government bailout in case of another financial crisis. The ratings would reflect the health of the banking sector in the country where it operates. It will also consider the strength of financial institutions in emerging economies compared with Europe and the U.S.

The new criteria will facilitate comparisons between banks across the globe by applying consistent measurements of companies’ capital stability.

The Consequences

With most of the financial institutions reeling under European debt crisis and sluggish economic recovery, the ratings downgrade for these banks could increase the already high funding costs. Additionally, it is expected to result in liquidity crisis. Many of the banks might have to increase the collateral and termination payments on trades and some may even end up with losses in the quarterly results.

However, it might not be as bad as we think. In fact, the ratings revisions and changed methodology will present a clear picture of the banking industry to the investors. Also, this new criteria will give S&P a better understanding of the various scenarios faced by the banks.

Additionally, this might help the financial institutions to prepare for another financial crisis. Most importantly, these could ultimately result in less involvement of taxpayers’ money in bailout of troubled financial institutions.