Standard & Poor’s is on a roll this week. First it issued a European “report card” on Tuesday warning of “vanishing prospects for a quick rebound” for banks in the eurozone, pointing to mounting bad debts on corporate and consumer lending and estimating that credit losses this year among the largest 50 European banks will nearly double from last year’s €128bn ($177bn).
The S&P warning followed a report from the European Central Bank, which on Monday warned that banks in the 16-nation eurozone faced $283bn of writedowns this year and next. And of course it fuelled rising anxiety among investors, especially with the news that S&P has negative outlook assessments on more than half of the continent’s biggest banks, with only Dutch group Rabobank now left AAA rated. Hypo Real Estate, the German property lender in the process of being nationalised, has the lowest rating at BBB.
Then S&P had a swipe at Russian banks (admittedly an easy target) saying OAO Sberbank, VTB Group and Russia’s other lenders are facing a surge in “troubled assets” that may total $213bn. As much as 38 per cent of all assets held by Russian banks, including restructured loans, may become problematic by the end of 2011, S&P said in a report on Wednesday, reports Bloomberg.
The agency later downgraded Russia’s ZAO Raiffeisenbank, ZAO Unicredit Bank, OAO Promsvyazbank and OAO Bank Uralsib and put on negative watch seven more Russian banks including the largest non-state lender, Alfa Bank, and OAO Gazprombank, the lending arm of Russia’s natural-gas exporter, and warned it was reviewing Russian bank ratings in coming weeks.
Now, as part of a review begun in November on the US banking industry’s risks, the credit ratings agency has downgraded 18 US banks, including Wells Fargo, Capital One and KeyCorp, citing tighter regulation and increased market volatility.
As Bloomberg reports on Thursday, S&P cut five of the US banks to junk states: Carolina First Bank, Citizens Republic Bancorp, Huntington Bancshares, Synovus and Whitney Holding, warning of the effects of a transition period on balance sheets as “institutions implemented changes”.
Among the other 13 banks downgraded apart from Wells Fargo, Capital one and KeyCorp were BB&T Corp, Fifth Third Bancorp, Regions Financial Corp. All seven were among the 19 companies which underwent the federal government’s stress tests earlier this year.
“Operating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision,” S&P said.
The significance of the move, based as it was on the notion of “less favourable” conditions, was not lost on investors, who sold off bank stocks on Wednesday dragging on the Dow and S&P 500 and driving the KBW Bank index down 3.3 per cent.
The Vix volatility index – Wall Street’s “fear gauge” – provided another bearish sign, closing above 30 for a third successive session, as the FT reports on Thursday. What’s more, Divyang Shah, of IFR Markets, told the FT, the Vix’s break through a downwardly sloping trendline suggests that the re-rating of risk “has the potential to become more severe”.
Now, the question is how far such re-rating will go up the line of the big banks. Indeed, the cost of protecting US financial company bonds from default jumped on Wednesday following news of S&P’s downgrades, extending the biggest increase in credit-default swaps since April. Reports Bloomberg:
Corporate credit slumped for the third day this week as S&P reduced its credit ratings or revised outlooks on 22 US banks because of tighter regulation and increased market volatility…[CDS] Contracts tied to the debt of Wells Fargo & Co and Capital One Financial Corp rose to the highest in more than a month after S&P lowered the banks’ ratings…
Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 12 climbed 1.5 basis points to 139.5 basis points at 4:15 p.m. in New York, according to Barclays Capital. They jumped about 8.5 basis points yesterday and 7 basis points on June 15, marking the biggest three-day increase since the period ended April 1, when they surged 18.2 basis points, according to CMA DataVision.
Undoubtedly S&P has a very good point about the changing conditions facing both the US and European banking industries.
But in the case of the US, coming on the heels of the government’s banking stress tests and Wednesday’s announcement by President Barack Obama of the most comprehensive financial regulation reform plans since the 1930s, it would be understandable if the banks are a little unhappy about downgrades based on the premise that the industry’s future “won’t be as good as the past”, as the Wall Street Journal put it.