Standard and Poor’s puts systemically important banks on ratings credit watch following review of government support


Background

S&P’s credit ratings assign a default probability that combines a bank’s stand-alone strength with the likelihood that it will get support from the state or from other sources in times of crisis. The uplift from state support is what could be lowered in the S&P’s review. Moody’s Investors Service and Fitch Ratings have a similar debt rating structure.

S&P utilises a Group Rating Methodology (GRM) and a Group Credit Profile (GCP) in assessing a bank’s credit rating. Until now, S&P have rated banks Non-Operating Holding Companies (NOHCs) one notch below the Group Credit Profile (GCP). This reflected the standard notching approach under the Group Rating Methodology (GRM) that recognizes the structural subordination of NOHC creditors’ claims compared with those of operating companies. The GCPs of banking groups currently include one or two notches of systemic support, over and above the “unsupported GCP”-that is, S&P’s view of the group’s intrinsic creditworthiness.

 

LONDON (Standard & Poor’s) Feb. 3, 2015-Standard & Poor’s Ratings Services announced that it has taken various rating actions on certain U.K., German, Austrian, and Swiss banks following a review of government support.

The banks in the U.K., Austria and Germany were singled out for ratings downgrades because those countries implemented rules requiring creditors to take losses before taxpayers at the start of this year, 12 months earlier than the rest of their peers in the 28-member European Union. The EU enacted the bank-resolution law last year in a bid to end taxpayer bailouts that prevailed in the financial crisis. S&P announced in November 2014 it would review the ratings of the banks affected by the move.

In its commentary on the results of the review S and P’s said:

“These actions reflect our view that extraordinary government support is now unlikely in the case of U.K. and Swiss non-operating holding companies (NOHCs), and are likely to become less predictable for operating companies in the U.K., Germany, and Austria.

We reviewed the rated systemically important banking groups in the U.K., Germany, and Austria: seven in the U.K., five in Germany, and three in Austria. We also reviewed, where relevant, the NOHCs of these U.K. banking groups, as well as Credit Suisse Group AG, the only rated NOHC of a systemically important Swiss banking group.”

As a result of the review S and P’s took the following actions:

1) They lowered the long term credit ratings of the Non-Operating Holding Companies of:

  • Barclays Plc
  • Credit Suisse Group AG
  • HSBC Holdings Plc
  • Lloyds Banking Group Plc

The outlook for these NOHC’s is now stable apart from Lloyds which is positive.

2) They lowered the long term credit ratings and the short term credit ratings of the NOHC’s of:

  • Royal Bank of Scotland Plc
  • Standard Chartered Plc

The outlook for these NOHC’s is now stable.

3) They placed on Credit watch with negative implications the long term credit ratings on the following principal bank operating companies and certain of their affiliates of:

  • Standard Chartered Bank
  • Royal Bank of Scotland Plc

Where relevant the short term credit ratings were affirmed.

4) They placed on Credit watch with negative implications the long and short term credit ratings on the following principal bank operating companies and certain of their affiliates of:

  • Barclays Bank Plc
  • HSBC Bank Plc
  • Lloyds Bank Plc
  • Nationwide Building Society
  • Santander UK
  • Deutsche Bank AG

The stable outlooks on most of the NOHCs reflect S & P’s view that there are currently no significant upward or downward pressures on these groups and largely as a result, they are unlikely to raise or lower the issuer credit ratings on these NOHCs within the two-year outlook horizon.

The Credit Watch placements on these bank operating companies led to the same action on their “core” and “highly strategic” subsidiaries where the ratings on those subsidiaries reflect an expectation that government support received by the parent would be down streamed to the subsidiary. This is notably not the case for the Hong Kong subsidiaries of Standard Chartered PLC and HSBC Holdings PLC (and its rated subsidiaries). Their ratings are unaffected by the review because they reflect the subsidiaries’ stand-alone credit strength and an (unchanged) expectation of potential systemic support from the Hong Kong government.

 

Summary of S&P’s rating changes

Table

NB: This table does not include all the ratings affected.

 

S&P’s comments on the outlook for U.K. bank operating companies

The CreditWatch placement on the seven U.K. banks’ relevant operating companies reflects the possibility that S&P may remove all systemic support notches. This could lead to a one-notch downgrade for HSBC Bank PLC and Standard Chartered Bank (and their relevant affiliates), and a downgrade of up to two notches for Barclays Bank PLC, Lloyds Bank PLC, Nationwide Building Society, Santander UK PLC, and the Royal Bank of Scotland PLC (and relevant affiliates).

In the case of Barclays, HSBC, Santander UK PLC, Standard Chartered, and RBS, S&P currently see no significant upward or downward pressure on their unsupported Group Credit Profiles. Notably, for RBS S&P no longer see downside risk to the ‘bbb’ unsupported Group Credit Profile because we believe that the group has made strong progress over the past 12-18 months in executing its latest restructuring plan, most notably the IPO of Citizens, the brisk run-down of its “bad bank,” and the stronger-than-expected improvement in asset quality.

S&P’s currently see a significant possibility that we could revise upward the ‘bbb+’ unsupported Group Credit Profile of Lloyds by one notch in the next 12 months. Similarly for Nationwide, it is possible that S&P may revise up the ‘bbb+’ unsupported Group Credit Profile within the two-year outlook horizon. This could reflect the stronger-than-expected recovery in Nationwide’s earnings, and the more successful performance and deleveraging of its commercial real estate book than expected, combined with ongoing improvements in its capitalization.

An unedited version of the Standard and Poors article can be found at:

http://www.standardandpoors.com/prot/ratings/articles/en/us?articleType=HTML&assetID=1245380518240

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