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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 (HBC - Analyst Report) 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), 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 - Snapshot 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.
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.
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