Fitch: Pace of Negative Rating Actions on Banks up in Q407
21 January 2008: Fitch Ratings says the positive bias in bank ratings continued to be eroded in Q407 as the number of negative rating actions accelerated. According to the latest Fitch quarterly series of "Global Bank Rating Trends" reports, a continuation of the current illiquid and volatile market conditions could lead to further pockets of negative rating action in 2008.
"Higher funding costs are likely to exacerbate risk aversion and reduce lending demand, while a slowdown in economic growth would undoubtedly mean higher risk costs for banks," says Alison Le Bras, Managing Director in Fitch's Financial Institutions Group. "Earnings and, in some cases, capital are thus likely to come under pressure in 2008."
While the liquidity shock that first hit financial markets in August 2007 resulted in only a handful of negative rating actions in Q307, it marked a turning point in bank rating trends. The negative movement intensified in Q407 with the number of negative rating actions accelerating to 69 from 13, the highest level since Fitch began the series of publications at the beginning of 2006.
The turnaround was most marked in developed markets, where there were 19 outright downgrades during the quarter, the majority in the Americas and Europe, where banks have been most affected by the ongoing global financial turmoil. Outlooks on a number of ratings have also been revised downward to reflect continuing vulnerability to aftershocks from the credit crisis. As a result, the ratio of Positive to Negative Outlooks fell to 2:1 in Q407 from 5:1 in Q107.
Of particular note are the negative rating actions taken on some of the large US banks, such as Citigroup and Bank of America as well as investment banks, Bear Stearns, Morgan Stanley and Merrill Lynch. In Europe, the main casualty to date has been the Swiss banking giant, UBS AG.
While globally 78.3% of bank ratings still have a Stable Outlook, Fitch expects rating deterioration to continue in 2008 and pockets of negative rating actions are likely if the current volatile market conditions persist.
(This is the press release of Fitch Ratings)
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