In a teleconference, Moody’s Investors Service said it does not foresee widespread ratings downgrades for the world’s banks as a result of the current market tensions.
The agency does, however, expect to see third quarter earnings decline for a number of banks and possible ratings downgrades for a handful of banks.
“We are unlikely to change bank ratings because of temporary liquidity problems,” said Moody’s Managing Director, David Fanger. “The financial system has been specifically designed to accommodate unusual funding needs. A number of central banks have provided liquidity to the market over the past week, and we are confident that they will ensure that liquidity-driven casualties do not occur system-wide,” he added.
Moody’s said it expects the financial fall-out of problems in the U.S. sub-prime mortgage market to be manageable for large universal banks in the EMEA at their current rating levels, given the diversification of these banks’ business and the fact that their overall net position in sub-prime and other affected asset classes should remain modest relative to each firm’s capital and liquidity.
The financial impact could be more significant, however, for a select number of smaller and less diversified banks in EMEA with less risk management expertise, and for less resilient businesses with lower levels of recurrent profitability and less ample capital cushions against a mark to market.
Looking at the Americas, Moody’s said it is by no means sanguine about the probable scenarios resulting from current market events on the future earnings performance of the banks or the likely stress on credit portfolios.
“We are modeling for a possible sharp deterioration, but we recognize that most banks approach this environment in a very healthy condition in terms of diversified and profitable business profiles, strong risk management capabilities and asset quality metrics, and robust capital levels,” said Moody’s Managing Director, Greg Bauer.
The banks’ generally high financial strength and deposit ratings, and the relative rankings of these ratings among the North American banks remain appropriately positioned, he added.
Asia’s banks and securities firms for the most part have only limited direct and indirect exposure to US sub-prime residential mortgages, CDOs, or liquidity facilities backing such instruments, and Asian banks’ exposure to US (or other) leveraged loans is even more limited. “These exposures pose no threat in and of themselves to either the creditworthiness or the liquidity of the region’s banks,” Moody’s said.
Those few Asian banks with more sizeable exposures relative to earnings or capital already have relatively lower bank financial strength ratings.
In addition to summarizing the credit impact of current market conditions for banks in the world’s major markets, the Moody’s teleconference also presented an assessment of broader, systemic conditions and Moody’s approach to evaluating risk in the current environment.
