Fitch Downgrades Global Bigwigs - Analyst Blog

Adding to the ongoing economic concerns, Fitch Ratings lowered its viability ratings on eight major global banks on Thursday. Moreover, long-term issuer-default ratings were also downgraded on six major U.S. and European banks.

The banks experiencing fall in their viability ratings includes Wall Street giants - Bank of America Corporation ( BAC ), The Goldman Sachs Group Inc. ( GS ) and Morgan Stanley ( MS ). The ratings were lowered to "bbb+", "a", and "a-" from "a-", "a+" and "a", respectively, for BofA, Goldman and Morgan Stanley.

Apart from these U.S. banks, the viability ratings of the five European banks, such as Barclays plc ( BCS ), Credit Suisse Group ( CS ), Deutsche Bank AG ( DB ), Societe Generale and BNP Paribas ( BNP ), were downgraded. Moreover, the ratings for Barclays, Credit Suisse and Deutsche Bank were revised to "a" from "aa-", while BNP Paribas's rating was lowered to "a+" from "aa-" and Societe Generale's rating moved to "a-" from "a+".

Furthermore, Fitch lowered its long-term issuer-default rating for BofA, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank and Goldman. Ratings for BofA and Goldman were downgraded to "A" from "A+". For Barclays, Credit Suisse and Deutsche Bank, the ratings were downgraded to "A" from "AA-". Moreover, BNP Paribas's rating moved to "A+" from "AA-".

However, Fitch affirmed the viability rating at a- for UBS AG ( UBS ). Additionally, long-term issuer-default rating was affirmed for UBS, Morgan Stanley and Societe Generale at "A", "A" and "A+", respectively.

Reasons for the Revisions

The primary reason for the ratings revisions is the weak economic environment and financial institutions' inability to withstand it. Besides, increasing regulatory moves has been adding fuel to the fire for the banking sector.

Financial institutions worldwide are facing numerous challenges in terms of retaining their business amid the current market turmoil. Though these institutions are trying hard to build capital and liquidity to protect themselves against global cues, their complex business models remain vulnerable to the challenges in the financial markets.

Moreover, it has become extremely difficult for the rating agency to assess the extent of losses that these banks might face in the weakening global scenario. Therefore, Fitch threatened that more downgrades is expected to come up in the banking sector for even well-managed institutions as they face challenges.

Fitch expects the market conditions to settle down gradually, but market volatility might remain heightened above historical averages.

Last month, Standard & Poor's (S&P) also lowered its credit ratings for many U.S. and European banks. Out of 37 banks reviewed by S&P, ratings for 15 were downgraded, while it remained unchanged for 20 and the remaining 2 were awarded upgraded ratings.

The revisions resulted from S&P's new methodology, which evaluates financial institutions' based on industry and economic risks, company specific strengths and weaknesses, and possibility of government bailout in case of another financial crisis. With the new criteria, it will also be possible to compare banks across the globe easily by applying consistent measurements of companies' capital stability.

Good or Bad?

The ratings downgrade could increase the already high funding costs for some of the banks that are already reeling under economic and regulatory pressure. It is expected to further increase the liquidity crisis.

However, it might not be as bad as we anticipated. In fact, the ratings revisions and changed methodology will give a clear picture of the banking industry to the investors. Additionally, this might help the financial institutions to prepare for another financial crisis. Most importantly, these could ultimately translate to less involvement of taxpayers' money for bailing out troubled financial institutions.

BANK OF AMER CP ( BAC ): Free Stock Analysis Report

BARCLAY PLC-ADR ( BCS ): 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

MORGAN STANLEY (MS): Free Stock Analysis Report

UBS AG (UBS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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