Following its ground-shaking downgrade of the United States' sovereign debt rating from AAA to AA+ on August 5, top credit rating agency Standard & Poor's downgraded several major U.S. and European banks this week and concurrently upgraded several Chinese financial institutions.
Trapped in its sweeping negative assessment were some of the biggest names in the U.S. banking sector, including Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, Bank of New York Mellon and Wells Fargo. S&P, however, raised its ratings on Bank of China and China Construction Bank Corporation.
Major European banks downgraded include HSBC Holdings PLC and Barclays PLC of the United Kingdom, Banco Santander of Spain, BNP Paribas, Societe Generale, and Credit Agricole of France, Deutsche Bank and Commerzbank of Germany, Credit Suisse and UBS of Switzerland, and the ING Group of the Netherlands.
While the shift in credit rating valuations possibly indicates S&P's contrasting views onthe economic prospects of financial institutions in the West and rapid-growth emerging markets such as China and India, the downgrade is likely to rattle markets.
Following the downgrade European stocks reportedly dropped and Asian shares also fell. In the U.K., HSBC and UBS shed at least one per cent.
In comments to media Ritesh Maheshwari, an analyst at S&P, said that the agency had applied a revised, “building-block, transparent approach,” in determining the new ratings, not necessarily a more stringent one. However, he noted that every bank's new credit rating would depend on the ‘starting point' under the new approach, which was in turn affected by S&P's assessment of the overall health of the banking system in the region.
It was at this juncture that “this whole issue about Asia versus the more developed system is coming up,” Mr. Maheshwari said. The Asian banking system's main advantage was funding, whereas “For Western systems it is not so much of a strength when you look at it relatively,” Mr. Maheshwari said. This applied in particular to the Chinese institutions involved, the analyst noted.
In the U.S., it was noted that the action could cost institutions such as Bank of America dearly, as their stock has already dropped over 60 per cent this year and was said to remain “mired under a cloud of legal issues associated with its ill-fated purchase of Countrywide.” BoA said in a regulatory filing that “A downgrade of one level would necessitate the posting of $5.1 billion of additional funds.”
Explaining its actions, S&P said it had reviewed its ratings on 37 of the largest financial institutions in the world by applying its new ratings criteria for banks, which were published on November 9, 2011.
While it only published a macro list of all 37 institutions reviewed the agency added that it would publish individual research updates on the bank groups identified, including a list of ratings on affiliated entities, as well as the ratings by debt type — senior, subordinated, junior subordinated, and preferred stock.