From Moody’s this morning come news of a possible downgrade for Australian banks in what looks to be blow back from Europe and Cyprus in particular. While it does not have an immediate direct impact on bank creditors one wonders how long senior unsecured debt holders, who are subordinated to both deposits less than $250,000 and covered bond holders, will feel comfortable.
Sydney, June 03, 2013 — Moody’s Investors Service announced today that it has put on review for downgrade eight Australian banks whose subordinated debt (subdebt) ratings have benefited from an uplift linked to Moody’s prior assessment of systemic support.
The affected banks are: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank Limited, Westpac Banking Corporation, , Macquarie Bank Limited, Bank of Queensland Limited, Bendigo and Adelaide Bank and Suncorp Metway Ltd.
The list of subdebt ratings being put under review is provided further below.
Moody’s highlights that the reviews of the banks’ subdebt ratings are not in any way related to any deterioration in the affected banks’ fundamental credit quality.
The review takes place in the context of a methodology update that has changed the way Moody’s looks at the probability of support, which has led to several subdebt ratings in multiple banking systems being reviewed simultaneously.
The revised methodology that underpins today’s announcement was formally announced in a separate document on May 31 following a public comment period launched in early April 2013. Both documents can be found on www.moodys.com, and their titles are “Moody’s Global Banks Rating Methodology (May 31, 2013) and “Moody’s Proposed Approach for Rating Certain Bank Contingent Capital Securities and Update to Approach for Rating Bank Subordinated Debt” (April 10, 2013).
Moody’s expects to conclude its review within the next three months.
RATINGS RATIONALE
The methodology update and the related rating actions announced today are driven by the conclusion that government policy to deal with ailing banks has evolved globally — albeit at different speeds and degrees across systems — in a way that makes support for bank subdebt less probable than before.
“Government policy has evolved towards the adoption of “burden sharing” principles, and gradually away from the automatic bail out of all creditors over the last few years” says Stephen Long, Managing Director for Asia Pacific Financial Institutions at Moody’s.
Moody’s also highlights that the many examples of losses being imposed on subdebt holders in the context of bank resolutions in other regions have lowered the probability that Asian authorities would feel obliged to support subordinated debt due to concerns about the risk of contagion. There would be little stigma attached to involving subdebt in burden sharing given these prior examples and given that the global regulatory consensus increasingly sees this as best practice.
“The willingness of governments and regulators to apply burden sharing principles and their ability to do so without causing contagion have been demonstrated in several recent cases where losses were effectively imposed on creditors along the entire credit hierarchy in order to recapitalize banks” Long adds.
With respect to Asia and more particularly Australia, Moody’s says that regulators have been reluctant to explicitly endorse the burden sharing principles and adopt special resolution powers.
Nevertheless, Moody’s says it is mindful that such a stance has emerged in the context of an absence of banking crises or bail-outs, and the politics of bank resolution could change materially in times of stress, and the region’s regulators may then be more inclined to borrow tools deployed elsewhere.
Moody’s explained that although the review for downgrade has nothing to do with any observable deterioration in the credit quality of the banks, it needs to assess whether the government’s likely behavior in times of stress has changed compared to previous assumptions.
Moody’s preliminary conclusion points to reasonable doubt over whether the status quo would survive test cases where governments provide significant financial support to banks, particularly in a systemic crisis that puts stress on the government’s own balance sheet. The rating agency has therefore placed the banks’ subdebt ratings under review for downgrade.
A Special Comment providing an extensive assessment of the factors that have led to the review and which will guide Moody’s during the review period will be published separately today. The publication will be entitled “Moody’s Reconsideration of Support for the Subordinated Debt of Asia-Pacific Banks”.
In the case of Suncorp Metway Limited, the bank’s junior subordinated and preferred stock ratings were also placed under review for downgrade. These ratings currently include uplift for potential intergroup support. The review will focus on whether the potential for intergroup support could also be affected by changing approaches to bank resolution, given that the bank, its parent Suncorp Group Limited, as well as the group’s large insurance operations are all regulated by the Australian Prudential Regulation Authority.
The Australian banks whose subdebt ratings currently benefit from a support uplift due to support and which have been placed under review for downgrade are listed as below. The list includes subdebts assumed as a result of M&A, listed under the name of the original issuer. The ratings shown are in the order of current subdebt program rating, current subdebt ratings, followed by current junior subordinated debt program rating, current junior subordinated debt rating and preferred stock rating, if these are under review:
Australia and New Zealand Banking Group, (P) Aa3, Aa3
Commonwealth Bank of Australia, (P)Aa3, Aa3
Bank of Western Australia, no program rating, Aa3
National Australia Bank, (P)Aa3, Aa3
Westpac Banking Corporation, (P)Aa3, Aa3
Westpac Banking Corp. (London Branch), (P)Aa3
WestpacTrust Capital NZ Limited, (P)Aa3
St George Bank Limited, no program rating, Aa3
Macquarie Group Limited, (P)Baa1
Macquarie Bank Limited (P)A3, A3,
Macquarie International Finance Limited (P) Baa1
Bank of Queensland Limited, (P)Baa2, Baa2
Bendigo and Adelaide Bank, (P)A3, A3
Suncorp Metway Ltd, (P)A2, A2, (P)A3, A3, Baa2
