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Fitch Explains Rationale for Downgrading Investment Banks
Fitch Ratings has taken rating actions on nine global trading and universal banks (GTUBs). Fitch has downgraded eight issuers’ Viability Ratings (VRs) and affirmed one, removing them from Rating Watch Negative where they were placed on Oct. 13, 2011. The actions were motivated by Fitch’s view that the GTUBs’ business models are [...]

Fitch Ratings has taken rating actions on nine global trading and universal banks (GTUBs). Fitch has downgraded eight issuers’ Viability Ratings (VRs) and affirmed one, removing them from Rating Watch Negative where they were placed on Oct. 13, 2011.

The actions were motivated by Fitch’s view that the GTUBs’ business models are particularly sensitive to the increased challenges the financial markets face.

These challenges result from both economic developments as well as a myriad of regulatory changes. Fitch incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges, which has kept the VR downgrades to one or two notches.

Nonetheless, Fitch continues to be of the opinion that, however well-managed, the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress. Furthermore, the complexity of their business models and exposure to fat tail risk make it more difficult to assess the size of loss that could emerge rapidly from unexpected events.

While regulation enhances creditworthiness of banks generally by forcing them to hold higher capital and liquidity and curbing risk-taking in some areas, it also restricts earnings potential and increases costs, which encourages increasing the scale required to remain efficient and will likely reduce the number of market participants.

Fitch believes the GTUBs are much better placed to deal with difficult market conditions today than in 2008. Capitalization and liquidity are improved and vulnerabilities reduced. The rating actions taken were based on Fitch’s assessment of creditworthiness against the relatively high rating levels that the GTUBs previously had.

The GTUBs have been improving liquidity, which has been a particular area of focus for the group. These banks ensure that they have significant liquid reserves in order to be able to meet obligations even if funding markets were to close for a significant period of several months. Although Fitch views such measures positively, the liquidity position would be less of a defense against any ‘bank specific’ concerns, should they arise, because a sound liquidity profile is expected of all the GTUBs.

The following highlights Fitch’s ratings actions:

Bank of America Corporation –Long-term IDR downgraded to ‘A’ from ‘A+’; –Short-term IDR downgraded to ‘F1′ from ‘F1+’; –Viability Rating downgraded to ‘bbb+’ from ‘a-’.

Barclays plc –Long-term IDR downgraded to ‘A’ from ‘AA-’; –Short-term IDR downgraded to ‘F1′ from ‘F1+’; –Viability Rating downgraded to ‘a’ from ‘aa-’.

BNP Paribas –Long-term IDR downgraded to ‘A+’ from ‘AA-’; –Short-term IDR affirmed at ‘F1+’; –Viability Rating downgraded to ‘a+’ from ‘aa-’.

Credit Suisse AG –Long-term IDR downgraded to ‘A’ from ‘AA-’; –Short-term IDR downgraded to ‘F1′ from ‘F1+’; –Viability Rating downgraded to ‘a’ from ‘aa-’.

Deutsche Bank AG –Long-term IDR downgraded to ‘A+’ from ‘AA-’; –Short-term IDR affirmed at ‘F1+’; –Viability Rating downgraded to ‘a’ from ‘aa-’.

The Goldman Sachs Group, Inc. –Long-term IDR downgraded to ‘A’ from ‘A+’; –Short-term IDR downgraded to ‘F1′ from ‘F1+’; –Viability Rating downgraded to ‘a’ from ‘a+’.

Morgan Stanley –Long-term IDR affirmed at ‘A’; –Short-term IDR affirmed at ‘F1′; –Viability Rating downgraded to ‘a-’ from ‘a’.

Societe Generale –Long-term IDR affirmed at ‘A+’; –Short-term IDR affirmed at ‘F1+’; –Viability Rating downgraded to ‘a-’ from ‘a+’.

UBS AG –Long-term IDR affirmed at ‘A’; –Short-term IDR affirmed at ‘F1′; –Viability Rating affirmed at ‘a-’.

On Oct. 13, 2011 UBS AG’s IDR was downgraded to ‘A’ from ‘A+’ due to a downgrade of its Support Rating Floor and its Viability Rating remained on Rating Watch Negative. Bank of America’s VR was placed on Rating Watch Negative on Oct. 13, 2011.

The full report Global Trading and Universal Bank Review: Resilience Increased but Challenges Remain, along with individual reports on each of the affected banks, are available at the Alacra Store.

Technorati Tags: Bank-of-America, Barclays, BNP Paribas, Credit-Suisse, Deutsche Bank, Goldman-Sachs, GTUB, investment-banking, JPMorgan-Chase-&-Co, morgan-stanley, Societe Generale, UBS

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