Barclays, Credit Suisse, Deutsche Bank Ratings Cut by S&P
Barclays Plc (BARC), Deutsche Bank AG (DBK) and Credit Suisse Group AG (CSGN) had their credit ratings lowered by Standard & Poor’s as new rules and “uncertain market conditions” threaten their business.
Long-term counterparty credit ratings for the three banks were cut one level, S&P said yesterday in a statement. The ratings firm affirmed its A long-term rating and A-1 short-term assessments on UBS AG (UBSN), according to the statement. The outlook for all four companies is stable.
Banks are still recovering from the 2008 financial crisis, which drove some economies into recession and spawned regulations and legal probes. The four European lenders are among the most exposed to proposed rules that could reduce revenue from trading and investment banking operations, the ratings firm said.
“We consider that these banks’ debtholders face heightened credit risk owing to the industry’s tighter regulation, fragile global markets, stagnant European economies and rising litigation risk stemming from the financial crisis,” S&P said. “A large number of global regulatory initiatives are increasingly demanding for capital market operations.”
S&P lowered its long-term ratings on the holding companies of Barclays and Credit Suisse (CS) to A- from A, while Deutsche Bank was cut to A from A+. Subsidiaries including Barclays Bank Plc and Credit Suisse AG were lowered to A from A+.
Barclays closed today at 280.75 pence, down 0.8 percent, in London, while Credit Suisse fell 2.6 percent to 25.04 francs and Deutsche Bank slipped 1.4 percent to 31.46 euros. UBS was down 0.9 percent to 16.04 francs in Zurich trading.
Bond risk for Credit Suisse and Barclays Bank Plc surged last week to the highest levels this year. Five-year credit-default swaps insuring the debt of Credit Suisse against non-payment advanced to 135 basis points on June 24, the highest since October, while contracts on Barclays rose to 177.7, the highest since November.
Swaps on Deutsche Bank jumped to 129.7 on the same day, the highest since March. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to debt agreements.
“The downgrade by S&P is a reminder to investors on the risk of these lenders in the uncertain environment,” said Ronald Wan, a committee member at Hong Kong Securities & Investment Institute. “The market is expecting the U.S. economy to recover but it’s unlikely to be a very strong recovery and the fate of the quantitative easing policy is still unclear. The stock valuation of these lenders may be negatively affected by the downgrade.”
S&P was among rating companies that were criticized for failing to foresee the housing bubble that contributed to the financial crisis. The U.S. is accusing the world’s largest credit rater of deliberately misstating the risks of mortgage bonds to keep its share of the booming business of repackaging home loans for sale as securities. The lawsuit seeks penalties that may amount to more than $5 billion, based on losses incurred by federally insured financial institutions.
S&P maintained its ratings for UBS because it considers the Zurich-based company to be “the most active bank in reducing its exposures to investment banking,” according to the statement. UBS, Switzerland’s biggest bank by assets, said in October that it will cut about 10,000 jobs and retreat from capital-intensive trading businesses.
Regulations that could hurt profit include the U.S.’s Volcker rule, which seeks to restrict banks from wagering on trades with shareholders’ cash, as well as new European Union rules on bonuses and proposed U.S. rules for foreign banks, S&P said.
Barclays, Britain’s third-largest lender by market value, was cut in part because of its dependence on investment-banking revenue, according to the statement. The London-based lender is also regulated by U.K. authorities at the “forefront of regulatory change,” S&P said.
Deutsche Bank, the biggest German lender, is facing “rising risks” in its investment-banking operations, S&P said. The Frankfurt-based firm and Barclays will both have to grapple with tougher capital and liquidity requirements for foreign banks operating in the U.S., which could crimp profit, according to the statement.
Credit Suisse, the second-biggest Swiss bank, gets about half of its revenue from investment banking, S&P said. While the Zurich-based firm has taken steps to improve its risk and increase capital, it faces a “volatile revenue and earnings stream,” the ratings company said.
Lenders have been forced by regulators to set aside more funds to protect against potential losses under the Basel Committee on Banking Supervision’s Basel III rules. While this has forced investment banks to become less risky, they are still “highly leveraged institutions” that continue to face litigation and business risks, S&P said.
“Barclays, Credit Suisse, Deutsche Bank, and UBS are among the most exposed in Europe to a combination of regulatory initiatives being undertaken globally on capital market-related businesses,” S&P said in the statement.