Bank downgrades likely, says S&P report

Credit ratings on the biggest banks in Western Europe and USA are likely to be downgraded due to the withdrawal of government bail-out support, according to ratings agency Standard & Poors.
A report released by the agency this week said that the most systemically important banks (SIBs) in Europe, as well as eight in the USA, have negative outlooks due to the withdrawal of government crisis support.
The conclusion reflects advice from other ratings agencies, and could increase pressure on local authorities to reconsider investments with these banks.
The report said: “Besides idiosyncratic factors, the negative outlooks primarily reflect that – all else being equal – we may lower ratings on SIBs that currently benefit typically by one or two notches from extraordinary government support as authorities implement resolution frameworks.”
The report said that ongoing waves of new regulatory and legislative initiatives in the wake of the financial crisis continue to push up banks’ compliance costs and restrict revenue growth opportunities and are “already impacting banks’ business models”.
David Green, client director at treasury management adviser Arlingclose, said that banks likely to be affected by downgrades would include Barclays, Deutsche Bank, UBS and RBS.
He said: “Banks are becoming less and less suitable for long-term deposits.
“Councils with investments with these banks will either have to lower their investment criteria to accept lower ratings or find other homes for their money.”
He said that he expected regulatory changes to begin affecting ratings from late next year.
Outside of the largest banks, S&P said that the effect of greater regulation would have a neutral effect.
It said: “In essence, we believe that from a ratings perspective there is a trade-off and potential conflict between improving a bank’s crisis resilience on the one hand, and, on the other, its potentially reduced capacity to generate capital through earnings or from market sources, and to exploit benefits from business and risk diversification.”
The report said that strongly capitalised and well-funded banks with simpler business models and lower embedded risk could maintain or even achieve high ratings, even if regulatory reform constrains profitability.