By John Glover/Bloomberg
London: Moody’s Investors Service cut the credit ratings of 44 banks, including units of ABN Amro Holding NV, ING Groep NV and Fortis, to calm protests over a new system for assessing financial institutions.
The downgrades, announced on 10 April in New York, were made about six weeks after Moody’s raised 150 banks it said could count on government support in a financial crisis. The new system provoked a furor when Iceland’s three largest banks were given the same rating as the US Treasury and Exxon Mobil Corp.
“It’s a step in the right direction,” said Tom Jenkins, an analyst at Royal Bank of Scotland Group Plc in London, who wrote a report last month titled “Moody’s Lose the Plot Completely.” “It’s going to be some time before Moody’s credibility in terms of bank ratings is fully restored,” Jenkins said in an interview on 10 April.
Moody’s, whose founder John Moody created the first credit ratings for US railroad bonds in 1909, was forced to reverse upgrades for banks after criticism from firms including Merrill Lynch & Co. and JPMorgan Chase & Co. Around 85% of investors in a Merrill survey last month said Moody’s had lost credibility because of the approach.
Icelandic lenders Kaupthing hf, Glitnir Banki hf and Landsbanki Islands hf had some of the biggest ratings cuts, dropping three levels to Aa3. Three steps was the largest downgrade Moody’s said it was considering for the banks it placed under review earlier this month.
OTP Bank Nyrt., a Budapest-based bank that’s eastern Europe’s largest lender by assets, was also cut, to Aa3 from Aa1. In February, Moody’s raised its A1 local bank deposit rating three steps to Aa1, justifying the ranking by saying some governments are willing to pay off bank debt before sovereign obligations to prevent a banking crisis.
Moody’s on March 16 pledged to “refine” its so-called joint-default analysis, giving more weight to analysts’ opinions.
“A number of bank ratings that were upgraded prior to the refinement were identified as being inconsistent with the refined methodology,” Moody’s said in a statement yesterday.
ABN Amro Bank NV was lowered to Aa2 from Aa1, and ING Bank was cut to Aa1 from Aaa. Fortis Bank was reduced to Aa2 from Aaa.
“Moody’s has backtracked to some extent but it doesn’t want to lose face completely by putting them all back to where they were,” said Simon Adamson, an analyst at CreditSights Inc. in London, in an interview yesterday. “The ratings for the Icelandic banks are still wrong, just not as wrong as with an Aaa.”
Adamson, who on March 4 called the new ratings “worthless” and ditched Moody’s, said he expected the revised grades to be “comparable” with those of Standard & Poor’s and Fitch Ratings.
The revised ratings are “still generous but they don’t look as bizarre as they did,” he said. “We’ll probably be able to use them again.”
Investors haven’t treated the Aaa ratings of the Icelandic banks as being on a par with the top ratings other lenders may have held for years.
The cost of protecting 10 million euros ($13 million) of bonds sold by Kaupthing hf, Iceland’s biggest lender, using five-year credit-default swaps is 54,000 euros a year. That compares with 7,500 euros a year to insure the bonds of Rabobank Nederland, which has held an Aaa rating from Moody’s for more than a decade. Investors use credit-default swaps to bet on a company’s ability to repay debt.