European Banks Could Face Downgrade: Moody's

Ratings agency putting many on review by end of March

Moody's Investors Service said that many European banks and global investment banks could be in for downgrades, and that it plans to place a number of them on review by the end of March.

The ratings agency on Thursday warned that several trends are taking a toll on the credit profile of banks globally, with a number of banks expected to be subjected to increased downward pressure as debt and deposit ratings fall during 2012.

According to the assessment, "deteriorating sovereign creditworthiness, particularly in the euro area … elevated economic uncertainty; and … elevated funding spreads and reduced market access at a time when many banks face large debt maturities" will "primarily affect the ratings of global capital markets intermediaries (the largest firms trading securities and derivatives) and, in Europe, other banks exposed to financial market disruption."

For these reasons, the ratings agency expects to review some of these institutions with an eye toward possible downgrades, and expects to take that action by the end of March. While Moody's does cite some positive trends, it says that they are "overshadowed" by the negatives.

Greg Bauer, Moody's global banking managing director, said in a statement, "The expected decline of bank ratings reflects the acceleration of interrelated pressures on the banking sector since the second half of 2011. These pressures most immediately affect global capital markets intermediaries and European banks."

Most European banks, according to the company, are vulnerable to the euro area debt crisis that reflects eroding investor confidence and a weakening regional economy. "Moody's concerns center on the ability of many European banks to retain the confidence of investors and counterparties and to fully refinance substantial 2012 term debt maturities," the company said.

It added, "To reflect these challenges in ratings, Moody's will further emphasize the forward-looking elements of its bank rating methodology, increasing the weight given to estimates of bank solvency under anticipated and stressed scenarios, and adjusting its views on the operating environment, franchise value, risk positioning and financial fundamentals for vulnerable banks. As a consequence, the standalone credit assessments and ratings for many European banks will likely decline."

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