The analysts who work in the ratings unit at Moody’s don’t always see eye to eye with their colleagues in the Capital Markets Research Group, particularly since the latter issue frequent reports pointing out that the bond and CDS markets often disagree with the ratings approved by the former.
Sometimes, however, they reach similar conclusions – as happened this month on the topic of Spanish banks.
Last week, CMRG analyst Lisa Hintz issued a report warning about the possibility of a large Spanish bank running into trouble; on Tuesday, Moody’s ratings unit said it was reviewing financial strength ratings of 36 Spanish banks for possible downgrade.
From that statement, emphasis ours:
[Moody's] also placed on review the deposit and senior debt ratings of 34 of these banks and the subordinated, junior subordinated and/or hybrid securities of 22 of these same institutions. Moody’s expects to conclude its reviews for the majority of these banks in the next several weeks.
Due in part to the anticipated availability of systemic support, Moody’s believes that any potential downgrade of the banks’ senior debt and deposit ratings will be likely limited to a maximum of two notches.
To date, due to “generic” provisions and strong recurring earnings, Spanish banks have displayed a relatively high risk-absorption capacity despite notable increases in non-performing loans (from 0.7% in December 2007 to 3.37% in December 2008 and 4.27% at the end of March 2009). Therefore, rating actions since 2007 have so far been mostly limited to those banks particularly exposed to the real estate sector…however, the outlook on the Spanish banking system has been negative since early 2008.
The current review for possible downgrade for 36 banks has been prompted by Moody’s expectation that the asset quality of Spanish banks will continue to deteriorate, leading to significantly higher credit losses than previously incorporated in the ratings and straining capitalisation.
Pressure on asset quality across all asset classes is coming from the now deep recession in Spain, which is expected to continue throughout 2009 and into 2010, coupled with very negative prospects for the labour market and the continued abrupt adjustment in the real estate and construction sector. The rapid deterioration of most banks’ loan portfolios, which started to be more visible in 2008, has severely reduced the general loan loss provisions that protected these banks from losses so far.
While initially the asset quality deterioration stemmed mostly from exposure to the commercial real estate sector, other asset classes are now also increasingly affected by the magnitude and breadth of the recession, thus having an impact on the much broader banking system.