Back to top

Analyst Blog

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

Providing great relief to the financial sector, Fitch Ratings has reiterated the long and short term Issuer Default Rating (IDR) of 12 Global Trading and Universal Bank (GTUB) peer group (formed last October and includes 13 major securities trading and universal banks). Only the review of HSBC Holdings plc’s ratings is yet to be completed, which would be done in the forthcoming two months.

The GTUBs whose ratings have been affirmed are – JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), The Royal Bank of Scotland Group plc (RBS - Snapshot Report), Credit Suisse Group (CS - Snapshot Report), Morgan Stanley (MS - Analyst Report), UBS AG (UBS - Analyst Report), Barclays PLC (BCS - Snapshot Report), BNP Paribas SA (BNPQY), Citigroup Inc. (C - Analyst Report), Deutsche Bank AG (DB - Analyst Report), The Goldman Sachs Group Inc. (GS - Analyst Report) and Societe Generale Group (GLE.PA).

Moreover, Fitch has re-affirmed the respective outlook for all, except JPMorgan. JPMorgan’s outlook was revised to ‘Stable’ from Rating Watch Negative.

As per Fitch’s rating methodology, a bank’s IDR is either its Viability Rating (VR), or its Support Rating Floor (SRF), whichever is higher. VR reflects the company’s inherent creditworthiness while SRF is Fitch's view on the probability of a bank receiving sovereign support.

The rating agency stated that of the 13 GTUBs, seven have their SRFs higher than VRs. Therefore, this makes their IDRs susceptible to the changes in Fitch's perception regarding chances of government support in case of failure.

Determinants of VRs

In order to determine the credit worthiness of GTUBs, Fitch has taken into consideration certain fundamentals (capital ratios, declining risk weighted assets, stabilizing credit quality and improving liquidity) as well as macro economic conditions. The improvement in these is considered as a positive rating driver.

Nevertheless, Fitch stated that GTUBs are likely to face challenging macro economic conditions and volatile capital markets (mainly in Europe) along with increasing regulatory burden and ambiguity. All these are expected to continue to pressurize earnings in the next couple of years. Though GTUBs are trying to streamline their businesses through restructuring and cost reduction initiatives to somewhat mitigate the pressure, investment in high growth areas continue.

Further, given the size and complexity of their operations, GTUBs also face legal, operational and reputation risks. Though these are difficult to be quantified, they continue to adversely impact the banks’ earnings. Moreover, Fitch commented that GTUBs’ overall capital base continues to improve. Though the leverage ratio for U.S. banks remains strong as compared to their European counterparts, the latter is now trying to improvise.

Underlying Principles for SRF

According to Fitch, the overall global policy is to stay away from fully supporting Globally Systematically Important Financial Institutions (G-SIFIs), in case of default. However, the discussions pertaining to this policy are making headway at an uneven rate. The rating agency anticipates that the regulators will continue to provide support to the G-SIFIs until a more advanced and aligned regulation is in place.

Though Fitch is closing watching the developments pertaining to continuing discussions related to providing support and bail-in, at present it has given ‘A+’ SRFs for German and French GTUBs while it furnished ‘A’ SRFs for GTUBs based in U.S., UK and Switzerland. The slightly lower SRFs for U.S., UK and Switzerland banks signifies that there is less political will in these countries to provide government support to banks in case of default.

Our Viewpoint

This is the second major ratings affirmation/revision announcement this year. Earlier in June, Moody’s Investor Services announced the credit ratings revisions for major global banks that dealt a blow to the already stressed financial industry.

Though the economic situation is still the same (challenging global economy recovery and uncertainty in the Euro-zone along with signs of slowdown in major emerging economies like India and China), the news of the rating affirmation by Fitch is a big relief for the banks. For GTUBs already facing higher funding costs and operating expenses, this reiteration will be a positive catalyst.

Further, this will enhance investors’ confidence in the overall financial sector. Also, this might help the financial institutions to brace themselves better for another financial crisis. Most importantly, this could ultimately result in less involvement of taxpayers’ money in the bailout of troubled financial institutions.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
ANI PHARMACE ANIP 29.82 +16.69%
ATLAS FINANC AFH 14.67 +3.02%
GREEN PLAINS GPRE 29.79 +2.90%
ALLIANCE FIB AFOP 17.73 +2.37%
VERTEX ENERG VTNR 7.49 +2.18%