Big noise out of Fitch this evening, as the ratings agency just threatened downgrades across the global banking system.
More important, perhaps, than the specific ratings is the broader commentary from Fitch:
Fitch Ratings-New York-13 October 2011: In conjunction with a broad assessment of the ratings for the largest banking institutions in the world, Fitch Ratings is conducting a review of the global trading and universal banks in its rating portfolio. As part of that review, Fitch has placed the Viability Ratings (VRs) of seven and the long-term Issuer Default Ratings (IDRs) of six global trading and universal banks on Rating Watch Negative. At the same time, Fitch has placed the short-term IDRs of four of the banks on Rating Watch Negative.
The banks impacted by these rating actions are as follows:
–Barclays Bank plc
–Credit Suisse AG
–Deutsche Bank AG
–The Goldman Sachs Group, Inc.
Fitch expects to resolve the Rating Watch Negative within a short time frame and to take corresponding rating actions where warranted.
A list of each bank’s key impacted ratings follows at the end of this release. Full lists of impacted ratings are contained in the individual rating action commentaries on each of these firms, which are available at ‘www.fitchratings.com’. Barclays Bank plc’s rating action was addressed earlier today; for details see ‘Fitch Lowers UK Support Rating Floors; Downgrades Lloyds, RBS to ‘A”.
Fitch expects that any downgrades of these banks’ VRs would in most cases be one notch and at maximum two notches. Most actions on the long-term IDRs will be limited to one notch as IDRs will not fall below the banks’ Support Rating Floors when applicable. Short-term IDR implications will also likely be a one-notch downgrade for those banks whose ratings are on Rating Watch Negative. It also possible that certain banks could have their ratings affirmed at current levels. Fitch also expects that many of these ratings should revert to Stable Outlooks upon resolution of the Rating Watches.
In a separate, but related report called Rating Banks in a Changing World, Fitch asks the trillion-dollar question.
Can a Bank Be ‘AAA’?
In addition to a small number of multilateral development banks, only 15 banks have a ‘AAA’ IDR, many fewer than 20-30 years ago. It is important to note that all of these top ratings are now achieved only due to close government ties with a ‘AAA’ state or sovereign and an expectation that support would be forthcoming if required.
The absence of any bank rated as ‘AAA’ based on its own financial profile (no banks have been assigned a ‘aaa’ viability rating) reflects the inherent risks associated with the banking business model. These risks include high levels of leverage, significant correlations between credit risks and due in large part to the maturity transformation that banks perform, a significant vulnerability to confidence effects. Given these inherent characteristics, Fitch considers that it is unreasonable to expect banks to be rated ‘aaa’.
As for what a good bank can expect:
What are the Attributes of an ‘AA’ Bank?
The strongest and most creditworthy banks are able to attain ‘aa’ viability ratings although given inherent bank risks noted above, such firms would need to demonstrate particularly strong features. In particular, Fitch’s expectations for such banks would typically include very tight lending standards and extremely high asset quality throughout the economic cycle, a leading franchise with sufficient scale and diversity to avoid risk concentrations, together with very high levels of capitalisation relative to risks, and very strong corporate governance and risk management. The agency would expect few, if any, qualitative or quantitative weaknesses in any of the agency’s main metrics.
Given the additional risks associated with the pure play investment banking business model, Fitch regards an ‘aa’ category viability rating as highly unlikely for such institutions.
The bottom line, says, fitch, due to sovereign debt woes, macro-economic uncertainty, and changing regulatory regimes, mostly associated with governments less inclined to support banks, all of the big players have to be seen as less safe than they were not too long ago.
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