fitch bank downgrades more than doubled in q2 special report 08052010

8/8/2019 Fitch Bank Downgrades More Than Doubled in Q2 Special Report 08052010

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Banks

www.fitchratings.com

Special Report Global Bank Rating Trends Q210Downgrades Double Positive Rating Actions Halve

Global OverviewSigns of stress reemerged in the financial sector in Q210 especially in Europe after it appeared to stabilise in earlier quarters. Fears over sovereigncreditworthiness and a doubledip recession grew even as the global economyrecovered further.

Rating activity fell significantly, to 83 rating actions in Q210 from 119 in Q110. Thenumber of positive actions more than halved to 41, or 49% of all rating actions from76% in Q110. Negative rating actions increased to 42 from 29 in Q110, significantly

worsening the ratio of positive to negative rating actions to 1.0 (Q110: 3.1).

Sovereignrelated rating activities played an important role for bank ratings inQ210: almost 40% of downgrades were in some way related either to the negativerating actions taken on the Spanish and the Greek sovereigns or to asset quality andearnings challenges facing the banks due to the tough economic conditions in thesecountries. On 9 April, the LongTerm Issuer Default Rating (IDR) of Greece wasfurther cut to BBB/Negative Outlook from BBB+, leading to a downgrade of themajor Greek banks and a Negative Rating Watch being assigned. The ratings onthese banks have subsequently been affirmed with a Negative Outlook. Spainssovereign rating was lowered to AA+ from AAA with a Stable Outlook on 28 May.

It is clear that the unprecedented scale of the macroeconomic stimulus provided

around the world prevented the recession from being even more severe. Itunderpinned the recovery of both the global economy and trade in the second halfof 2009, and continues to support growth. However, the fiscal costs of the crisis andrecession have been even greater than expected and the creditworthiness of somesovereigns, such as Greece, Spain, Portugal, Italy and Ireland, has come undergreater scrutiny and market pressure sooner than anticipated.

Fearing higher risk premiums, governments around the world started to introducemeasures to reduce their deficits in Q210. With a fasterthanexpected withdrawalof this stimulus, the headwinds for the global economy are going to intensify, andtime will tell whether private investment and consumption are able to fill this gap.

With rising public debt levels, claims on governments have assumed greaterprominence on some bank balance sheets, notably in the euro zone. Volatility inthe value and credit profile of the issuers behind some of these claims links theprospects of banks even more closely to sovereign entities.

Globally, most of Fitchs bank ratings continued to have Stable Outlooks (72.7%) atendQ210. The rest still mainly comprised Negative Outlooks (16.3%), with theproportion of Positive Outlooks at a slightly improved 3.7%.

The global ratio of Negative to Positive Outlooks showed a further significantimprovement, to 4.4 at endQ210 from 11.2 at endQ110 (see Chart 1). Indeveloped markets, the ratio stood at 8.9 (endQ110: 11.9). Emerging marketssaw the biggest shift in Negative to Positive Outlooks, with an improvement to 2.0from 12.8 at endQ110. In developed markets, this ratio varied from 2.3 indeveloped Asia/Australasia to 23 in developed Europe. In emerging markets, the

ratio ranged from +3.4 in emerging Americas to 25.0 in emerging Europe.

Analysts

Gerry Rawcliffe+44 20 7682 [email protected]

Thomas Abruzzo (North America)+1 [email protected]

Bridget Gandy (EMEA)+44 20 7417 4346

[email protected]

James Longsdon (EMEA)+44 20 7417 [email protected]

Brett Hemsley (Asia)+81 3 3288 [email protected]

Peter Shaw (Latin America)+1 212 908 [email protected]

ResearchSebastian [email protected]

Related Research

Global Bank Rating Trends: A New Quarterly

Publication (April 2006)

Global Economic Outlook (April 2010)

BackgroundThis publication continues the seriesdating from the beginning of 2006,and presents quarterly data up to andincluding Q210. Data prior to Q405are included in earlier publications.Charts showing the distribution acrossrating categories are also included

(Charts 5 and 6 below).
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509645http://www.fitchresearch.com/creditdesk/reports/report_frame.cfm?rpt_id=271284mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Global Bank Rating Trends Q210August 2010 4

EuropeIn developed Europe, the proportion of ratings with Stable Outlooks increased veryslightly, to 66.0% at endQ210 from 65.3% at endQ110. At the same time, the

proportion of Negative Outlooks remained relatively stable at 19.3% (Q110: 20.7%).

At endQ210, almost twothirds of Negative Outlooks in developed Europe relatedto banks in Italy, Spain and Portugal, reflecting economic challenges for thesecountries. Fitch also has elevated funding concerns for certain issuers in thesemarkets. In Q210, 80% of all new or affirmed Negative Watches related to Greekand Spanish banks.

Overall, the proportion of banks that were on Rating Watch Positive in developedEurope at endQ210 increased slightly to 2.5%. The number of banks on NegativeWatches decreased to 23 at endQ210 from 25 at endQ110. This made up 9.5% ofall Outlooks and Watches. Evolving Watches increased slightly to 1.7% at endQ210.There continued to be no Evolving Outlooks.

The main rating actions affecting Outlooks and watches in Q210 were as follows.

ItalyBanco Popolare (A) was put on Negative Outlook, after the Rating WatchNegative was resolved. This rating action reflects the progress in working out someof the banks largest impaired exposures and in strengthening its capital base.However, the banks IDR remains on Negative Outlook because Fitch considers thebanks impaired loans, partly inherited from the acquisition of Banca Italease(BBB+/Negative Outlook), to remain high and capitalisation modest in relation tothese loans.

SpainThe Outlook for Caja de Ahorros de Asturias (Cajastur; A) was revised to Negative

from Stable, due to the high probability of Cajastur integrating the retail bankingbusiness of Caja de Ahorros de Castilla La Mancha (CCM; BB+). This could give riseto integration and execution risks due to CCMs relatively large size and weakfinancial position.

Banco Guipuzcoano (A) was put on Rating Watch Positive from Negative Outlook,following the approval of its merger with Banco de Sabadell (A).

Caixa dEstalvis Laietana (BBB) and Caixa dEstalvis de Girona (BBB) were alsodowngraded and put on Rating Watch Negative, reflecting concerns over assetquality and earnings.

IrelandAnglo Irish Bank Corporation Ltd (A) was placed on Rating Watch Evolving followingthe proposal to split the bank into a new bank and a legacy asset company. The RatingWatch is expected to be resolved once there is more clarity on this proposal.

GreeceIn April, National Bank of Greece S.A. (BBB), Efg Eurobank Ergasias S.A. (BBB),Alpha Bank (BBB), Piraeus Bank (BBB) and Agricultural Bank of Greece (BBB)were put on Rating Watch Negative following a downgrade to the Greek sovereignrating. These Rating Watches were subsequently resolved on 16 July 2010 (all of theabovementioned Greek banks are now rated BBB/Negative Outlook) following theimplementation of the EU/IMF support framework, as well as liquidity support fromthe ECB following the temporary amendments of ECB criteria regarding theeligibility of collateral for Greek government debt and stateguarantee issues.

T BANK S.A. (B) was placed on Rating Watch Evolving from Rating Watch Negativedue to the banks share capital increase, which was largely subscribed by its newmajor shareholder, TT Hellenic Postbank S.A.


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GermanyBHFBANK AG (A) has remained on Rating Watch Evolving since endQ110. BHF ispart of the Deutsche Bank Group, which is assessing future strategic goals that

might result in the sale of BHF. The Watch will be reviewed once there is moreclarity on the future ownership structure.

Asia/AustralasiaThe number of Negative Outlooks remained stable in developed Asia/Australasia inQ210. Most ratings continued to be assigned Stable Outlooks (76.4%).

In Q210 the Outlooks of both Australia & New Zealand Banking Group (AA) and itswholly owned subsidiary ANZ National Bank Limited (AA) were revised to Positivedue to the full acquisition of its wealth management operations. This acquisitiondiversifies the groups income streams and supports expansion plans in Asia.

Japanbased Shinsei Bank, Ltds Issuer Default Rating was downgraded to BB+from BBB and the Outlook was set to Stable from Rating Watch Negative. Thisrating action reflects a significant 15% depletion of the banks Tier 1 capital overthe fiscal year to endMarch 2010. Out of the nine banks that were on NegativeOutlook at endQ210, seven were based in Japan. This reflects the continuouslydifficult operating environment for the Japanese banking sector, despite somemarginal improvement at the end of the 2010 fiscal year.

Trends in Rating Outlooks and Watches: EmergingMarkets

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Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210

Emerging markets EM Americas EM Central and Eastern EuropeEM Asia EM Middle East and Africa

(Ratio of Positive to Negative Outlooks)

Chart 3: Emerging Market Rating Stock

Source: Fitch

The ratio of Negative to Positive Outlooks in emerging markets improved markedlyagain in Q210. This was significantly affected by the Outlook change of the Brazilsovereign from Positive from Stable, which led to 12 Brazilian banks also being puton Positive Outlook. At 2.0, the ratio of Positive to Negative Outlooks reached alevel last seen in Q106 and improved significantly compared with its alltime low inQ309, when it fell to a value of 60.0. This positive global development in the ratiowas also supported by both emerging Europe and Asia.

In emerging America, the ratio turned to +3.4 at endQ210 from 1.5 at endQ110.This makes emerging America the only region among both developed and emergingmarkets that shows a positive ratio of Negative to Positive Outlooks.

A positive contribution for the ratio also came from emerging Europe. Despite stillbeing the market worst affected by the financial crisis, the ratio further improvedto 25.0, compared with the alltimelow of 88.0 in Q309. The proportion of banks

with Stable Outlooks increased to 79.7% at endQ210 from 77.1% at endQ110.

Ratio of Negative toPositive Outlookscontinued to improve


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Most Negative Watches can be attributed to the downgrading of the subsidiaries ofGreek banks. United Bulgarian Bank (BB+) and Eurobank EFG Bulgaria AD (BB+)were put on Rating Watch Negative. In Romania, the same happened to Banca

Romaneasca S.A. (BB+).In Q210, the proportion of Stable Outlooks continued to rise and reached 67.7% atendQ210. This increase was driven by the resolution of the Watches of Russianbanks, of which most were assigned Stable Outlooks in Q210. Compared with Q309,this means that Stable Outlooks have almost doubled.

AsiaIn emerging Asia, the proportion of Stable Outlooks remained high, despite a slightdecrease to 92.3% from 94.5%. The number of ratings with a Negative Outlook wasfour (or 4.4% of ratings at endQ110), the same level for the third consecutivequarter.

Notable rating actions included the following.

TaiwanThree of the four Negative Outlooks in emerging Asia remained assigned toTaiwanese banks: Bank SinoPac (BBB+), Far Eastern International Bank (BBB)and Taichung Commercial Bank (BB+). Fitch expects the banking sector in Taiwanto report better earnings in 2010, although substantial fears do remain regardingmortgage quality due to an increase in property prices since their trough in Q203.

Waterland Financial Holdings (BBB) and its subsidiaries were put on Rating WatchNegative, reflecting Fitchs view that the acquisition of the Taiwan operations of USlife insurer MetLife Inc. will strain Waterland Financial Holdings capital strength.

There continued to be no banks on Evolving Outlooks or Watches at endQ210.

MalaysiaCIMB Bank Berhad (BBB+) was put on Positive Outlook during the quarter. ThePositive Outlook recognises the banks improved financial profile, which remainedresilient during the downturn.

ThailandSiam City Bank Public Company Limited (BB) remained on Rating Watch Positive.This follows the announcement of the banks planned acquisition by ThanachartBank Public Company Limited. The acquisition will make Thanachart Bank PublicCompany Limited the fifthlargest banking group in Thailand, increasing its systemicimportance. The acquisition should also improve the banks capital and fundingprofile as well as its financial performance.

AmericasIn the emerging Americas, the proportion of Stable Outlooks decreased markedly to69.0% at endQ210 from 84.9% at endQ110. The number of banks on PositiveOutlook more than quadrupled to 17, which represented 24.9% of Outlooks andWatches. This lifted the ratio of Negative to Positive Outlooks to +3.4 the onlypositive figure among all regions.

As noted above, the jump in Positive Rating Outlooks can be attributed to thechange in the Outlook for the Brazilian sovereign, which was revised to Positive.The Outlook revision reflects Brazils betterthanexpected resilience and economicperformance in the face of the global recession, which together with its relativelyprudent economic policies should allow the countrys per capita income and fiscalsolvency ratios to improve steadily during the forecast period. The banking sector is

expected to benefit from this development.


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The proportion of ratings with a Negative Outlook declined slightly to 7.1%. Most ofthese Outlooks continue to relate to banks from El Salvador. The potential for thesebanks rating Outlooks to be revised to Stable is contingent on the level and timing

at which the sovereign rating stabilises.At endQ210, there were no banks on either Rating Watch or Evolving Outlooks inthe region.

Middle East and AfricaIn Q210, the Middle East and Africa saw Stable Outlooks maintained at a very highlevel of 95.0%. There were four Negative Outlooks.

Two banks from South Africa remained on Negative Outlook: Absa Bank Limited(A) and FirstRand Bank Limited (BBB+). The Negative Outlooks reflect thecontinuing downward pressure on South Africas Country Ceiling since the revisionof the Outlook of the South African sovereign rating.

In Q210, UAEbased Dubai Bank (BBB) and Bahrainbased TAIB Bank BSC (B+)

were assigned Negative Outlooks. The revision of the banks Outlooks is a result ofuncertain strategies, weakened financials and low profit expectations for 2010.

Rating ActionsThe number of rating actions decreased markedly to 83 in Q210 from 119 in Q110.Globally, the total of positive actions more than halved to 41 with significantlyfewer Positive Watches and Positive Outlook Changes driving this development. Atthe same time, total negative actions increased by 45% to 42, led by a sharp rise indowngrades. While in Q110 rating downgrades accounted for only 13.5% of all ratingactions, the proportion rose to 39.8% in Q210.

Developed MarketsIn developed markets, total rating actions increased significantly: to 40 in Q210. Only

onefifth of total rating actions were positive. There were no upgrades and 80% of totalrating actions were negative. Consequently the ratio of positive to negative ratingactions deteriorated to 4.0 from 2.0 in Q110. In Q210, downgrades in the developedmarkets doubled to 25, making up 62.5% of all rating actions.

Out of the 25 developed market downgrades, 22 related to developed Europe, withGreek and Spanish banks accounting for almost 60% of these actions. Thisdevelopment reflected the sovereign rating actions and growing concerns over thefinancial soundness of the Greek and Spanish economies, and their implications forthe domestic banks.

In France, BNP Paribas was downgraded to AA/Stable Outlook from AA, overconcerns regarding its business mix, which continues to show a relatively highcontribution from corporate and investment banking, and further asset qualitydeterioration in 2009. Consequently BNPs subsidiaries, Belgiumbased Fortis Bankand USbased BancWest Corporation, were downgraded to A+ from AA.

Emerging MarketsRating actions in emerging markets halved to 43 in Q210. While rating upgradesremained broadly stable, there were sharp decreases in changes to PositiveWatches and Outlooks. At the same time, total negative rating actions increasedonly slightly in Q210. Driven by the significant drop in positive rating actions, theratio of positive to negative rating actions deteriorated markedly but remainedpositive at +3.3.

In emerging markets, rating downgrades doubled to eight in Q210, which made up18.6% of all rating actions. About 60% of downgrades related to emerging Europe,

where the subsidiaries of Greek banks (Eurobank EFG Bulgaria AD, BancaRomaneasca S.A. and United Bulgarian Bank) were downgraded to BB+ fromBBB, following the negative rating action on the Greek sovereign.

Ratio of positive tonegative rating actionsturned negative after twoconsecutive positivequarters

Sovereign rating actions onGreece and Spain driversbehind development


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In Russia, International Industrial Bank was downgraded twice from B to CCC,and then to C reflecting the banks stressed liquidity position (in Q310 the bankwas downgraded to RD following default on an outstanding Eurobond).

In Q210, many of the Positive and Evolving Watches relating to banks from theRussian Federation were resolved. This resulted in nine Russian banks beingupgraded, including OJSC AlfaBank and MDM Bank to BB and NOMOSBANK toBB. The upgrades reflected the banks reasonable capital positions, the generallybetterthanexpected performance of the Russian banking sector during the crisis,and the fact that certain aspects of Russias banking system infrastructure haveimproved, most notably in respect of banks ability to access liquidity.

Bank Audi S.A.L. and Byblos Bank S.A.L. were both upgraded to B from B,following the upgrade of the Lebanese sovereign to B. Lebanons banking systemis one of the country's main strengths. Liquid and consistently profitable, theLebanese banks have withstood the effects of the global credit crunch and theinternational economic challenges as well as the recent political unrest.

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Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210

Global Developed markets Emerging markets

(Ratio of positive to negative actions)

Chart 4: Global Rating Flow

Source: Fitch

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'AAA' 'AA' 'A' 'BBB' 'BB' 'B' 'CCC' 'CC' 'C' 'D'

Chart 5: Developed Market Rating Stock(EndQ210 rating distribution)

Source: Fitch

(%)

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'AAA' 'AA' 'A' 'BBB' 'BB' 'B' 'CCC'

Chart 6: Emerging Market Rating Stock

(EndQ210 rating distribution)

(%)

Source: Fitch


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fitch bank downgrades more than doubled in q2 special report 08052010

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