Moody’s Fading Relevance Exposed in Nordic Downgrades
The response to the Moody’s Investors Service downgrade of the biggest Nordic banks was rising bond and share prices.
The reaction is the latest sign that investors are paying less attention to the views of rating companies and relying more on their own analysis to determine whether to buy or sell.
“We can see for ourselves just how strong the Swedish banks are so we don’t place much weight on what rating agencies tell us,” Nicklas Granath, a partner at Stockholm-based asset manager Norron AB, who helps manage about $200 million, said in an interview. “More and more the market is likely to take the same approach.”
As European policy makers try to reduce the dominance of rating companies in financial markets, investors are showing greater willingness to ignore Moody’s, Standard & Poor’s and Fitch Ratings. Denmark, which holds the European Union presidency, said this month it won backing in the 27-member bloc to curtail the influence of the raters. Danish banks have started firing Moody’s, while Swedbank AB (SWEDA), one of Sweden’s four biggest lenders, has said the views published by rating companies are “backward looking.”
Moody’s last week lowered Sweden’s Nordea Bank AB (NDA) and Svenska Handelsbanken AB (SHBA) to Aa3, and Norway’s DNB Bank ASA to A1, all single-level downgrades. Credit grades of SEB AB (SEBA) and Swedbank AB were affirmed while Landshypotek AB was cut two steps to Baa2. All ratings carry stable outlooks, Moody’s said.
Handelsbanken’s shares rose on the day after the May 24 downgrade. Nordea was up as much as 1.4 percent and DNB climbed as much as 1.6 percent, before erasing gains that day. Nordea shares advanced as much as 1.3 percent and were trading lower by 0.3 percent to 54.45 kronor at 1:28 p.m. in Stockholm today. Handelsbanken increased 0.8 percent, topping the 0.9 percent loss of the Bloomberg Europe Banks and Financial Services Index.
The yield on Nordea’s benchmark 1.25 billion-euro note maturing in 2019 has declined four basis points to 2.61 percent over the past three days, while the yield on a five-year Handelsbanken dollar note slid two basis points to 2.60 percent on May 25. The yield moves inversely to price.
A similar response has also been seen in the sovereign debt markets, where U.S. Treasuries last year rose after S&P stripped the world’s largest economy of its top grade. The Bank of England said in March there was “little market reaction” to Moody’s decision to cut the outlook on its rating to negative.
“The Nordic banks are in general very solid and have currently no issues in funding,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $72 billion. “Moody’s is knocking down open doors with this. In these volatile markets the rating agencies are definitely behind the curve and, strangely enough, could be at risk of being considered irrelevant by the market during times when they actually do have something critical to say.”
The downgrades were justified by the “comparatively high reliance on wholesale funding, which Moody’s regards as less reliable under a severe stress scenario,” the company said. The downgrades were necessary even though “Swedish banks have strengthened their capitalization since 2008,” Moody’s said.
The cuts were part of a review of 114 European lenders announced in February. Moody’s downgraded 16 Spanish banks on May 17 as the euro region’s fourth-largest economy struggles to stay afloat without an international bailout. The ratings reductions follow pledges by banks to boost capital levels following European stress tests.
S&P on May 25 also downgraded five Spanish banks to junk.
Denmark, which is bringing its proposals to the European Parliament, says ratings often don’t reflect credit risks. Measures to improve the industry include a plan to cut reliance on ratings for both investors and within financial regulation, the Business Ministry in Copenhagen said May 21. The intention is also to make it easier for investors and issuers to demand compensation from ratings companies that fail to do their job properly, the ministry said.
In Denmark, banks have started firing Moody’s after winning assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value. Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s in April, citing its “volatile” views. Danske Bank A/S (DANSKE) Chief Executive Officer Eivind Kolding in an interview in May criticized Moody’s view on systemic support, less than a year after the bank’s mortgage arm sacked the company.
Moody’s, which published its first guide to securities in 1900 after being founded by John Moody, said investors value the global comparability its ratings offer.
“The ongoing debate surrounding Moody’s credit opinions is a testament to our relevance,” Jessica Sibado, a Moody’s spokeswoman said in a phone interview today.
Swedish banks, still among the best-rated in Europe, are now signaling they may rethink their cooperation with the rating company.
“We’re surprised we were even on Moody’s list,” Thomas Backteman, head of corporate affairs at Swedbank, said in an interview. “We plan to continue our talks with Moody’s about their methodology and process.”
Momentum is building against ratings companies, which failed to identify some of the imbalances that led to the global financial crisis of 2008. There’s also evidence that ratings downgrades play less of a role in determining the value of bonds. U.S. Treasuries with maturities longer than one year have returned 5.7 percent since Standard & Poor’s stripped the U.S. of its AAA grade on Aug. 5. Credit-default swaps show the U.S. is deemed a better investment for bondholders than the U.K., which is still AAA rated at S&P.
According to a 2011 U.S. Senate report, both Standard & Poor’s and Moody’s adjusted the way they graded mortgage-backed securities after Goldman Sachs Group Inc., UBS AG and at least six more banks pressured them. When the ratings companies changed their assessments in July 2007, it helped trigger the financial crisis, the Senate Permanent Subcommittee on Investigations said in April last year.
“Moody’s in general is very backward looking; they are often stating things that are well recognized from the financial community for a long time,” Swedbank Chief Financial Officer Goran Bronner said in response to Bloomberg questions on May 23. “I don’t think Swedish banks should put any particular emphasis on it.”
Part of the problem is that the credit ratings industry is dominated by too few companies, Danish Business Minister Ole Sohn said on May 21. Raters themselves need to be better regulated and conflicts of interest removed, he said.
“It is hard for” rating companies “to keep track and when you come close to them it is quite apparent they have difficulty following everything that is happening elsewhere,” Bronner said. “The key is more transparency and then the market can decide.”
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