Oh dear. Just four months months after its widely criticised flip-flop on CMBS ratings, Standard & Poor’s has managed to tie itself into a fresh series of knots.
The rating agency is now backpedalling on its assessment of UBS. Specifically, the Swiss bank complained on Tuesday that S&P’s hot-off-the-presses proprietary ranking of banks by capital adequacy — which placed UBS near the bottom of the list — was totally unfair.
According to UBS, S&P’s assessment was based on balance sheet data as the end of June, and as such, neglected more recent actions by banks to bolster their capital strength.
UBS said the rating agency had failed to account for SFr6bn in mandatory convertible notes (MCNs) that had been fully converted by the Swiss government in August, and for another SFr13bnn in MCNs due to be converted by March 2010.
The official response from S&P is that it is standing by its less-than-favourable assessment of UBS:
The purpose of our report was to provide a snapshot, as at June 30, of the comparable capital position of the world’s largest banks, based on our methodology for assessing capital adequacy at that point in time on a globally consistent basis. We are comfortable with our assessment of UBS in this context
But according to the FT, which cited “S&P insiders”, the rating agency plans to issue a “supplementary statement” in the next few days that will clarify matters.
Specifically, the statement would “clarify” that UBS’s so-called risk adjusted capital ratio would be a much-healthier 7.2 per cent, instead of the 2.2 per cent initially assigned, once the effect of the MCNs was take into account. It would also adjust its ratio for Citigroup to 6.1 per cent, versus the originally reported 2.1 per cent.
S&P also disclosed its intention to update the ratios in a conference call with investors and banks. Our favourite quote from the FT story, as atttributed to an insider:
Just to be fair, we will update rapidly our analysis of UBS and Citigroup.
In a note on Tuesday, analysts at BNP Paribas said S&P’s decision to publish the report “could force banks into more transparency”:
Hey, UBS was the first bank to disclose its RAC ratio! Could this become a norm? Therefore, it should also force more discipline onto the banks. We welcome this move.
Effectively, S&P is already forcing Basel III on the banks, even harsher than the Basel committee in areas such as trading assets, so Basel rules are merely coming up to S&P’s standard.
It’s a shame that S&P’s ’standards’ have, once again, been demonstrated to be highly malleable.