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
) 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.
Bank of America Corporation
The Royal Bank of Scotland Group plc
Credit Suisse Group
BNP Paribas SA
Deutsche Bank AG
The Goldman Sachs Group Inc.
Societe Generale Group
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
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.
BANK OF AMER CP (BAC): Free Stock Analysis
BARCLAY PLC-ADR (BCS): Free Stock Analysis
(BNPQY): ETF Research Reports
CITIGROUP INC (C): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis Report
ROYAL BK SC-ADR (RBS): Free Stock Analysis
UBS AG (UBS): Free Stock Analysis Report
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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