European Bank Downgrades To Accelerate - S&P

Standard & Poor’s expects to see an acceleration in the number of rating downgrades of European banks in the second half of 2008 and into 2009.

And the difficult funding environment for smaller or more specialized institutions may also encourage some consolidation, S&P says in its latest Industry Report Card. “Although the main factors driving rating actions in the last year were liquidity pressures and the impact of write-downs, we expect rating actions over the coming year to be driven primarily by concerns over the level of credit losses in loan books, and by differences in capital philosophy.”

S&P expects global investment banking revenues, excluding write-downs, to decline some 20%-30% in 2008 compared with 2007. “Performance for the year to date is broadly in line with this expectation, but there is clearly downside risk to this estimate. We expect cost flexibility to help mitigate the impact of lower revenue, with some significant reductions in staff numbers, but restructuring in itself can be costly. There is also a risk of litigation costs.

This combination of factors offers the potential for a significantly worse scenario to unfold.

(Click chart to enlarge.)

Capital policy is likely to become a greater driver of rating trends, S&P says. “Banks that are adopting more conservative capital approaches are likely to protect their ratings more than those that continue to maintain more aggressive philosophies. We note that capital has not been a relative ratings strength for many of the major European banks, but instead has been a neutral to constraining ratings factor. Bank ratings would be underpinned if more cautious stances were taken by banks to reflect the heightened market uncertainties.”

S&P’s Industry Report Card provides individual analysis of 50 European Banks.

Comments

[gabe borens...:]

The downgrading of the European Banking Instiutions is the first warning to the investors bullish on Europe.
The downgrading will lead to an objective evaluation of the risks that Europe faces but ignored by all.
The high rates imposed on European Union members and Europe in general combined with a record per capita debt,will lead to a major economic implosion.Emerging markets will follow .
The U.S will become "flight to quality"haven as in the U.S we are already addressing the key problems that have lead to the current debacle.
Let's hope that ECB will be as competent rescuing their institutions as the FED is addressing our debacle.
I have warned investors about the current U.S debacle twice .Once in an interview with Mark Gilbert(Bloomberg London) in June ,2005.The second time with the Brian Sullivan TV interview(Bloomberg),o... Sepember18/2007.
Now I am saying that Europe will be facing economic and financial issues that could equate with the Armageddon. Emerging market economies will follow .U.S markets will ascent to the record highs.
Downgrading of the European Banks will be the necessary catalyst leading to unprecedented debacle-period.

2008 Jul 26 10:42 PM

[lblaine:]

Gabe:

I agree with your assessment. Because of a declining US$, US assets will be so cheap that their prices will surge.

2008 Jul 27 04:36 PM

[Robert Mcdo...:]

The S&P downgrades of banks' credit ratings - of those that benefit from government guarantees and shareholdings is very dubious and counter-intuitive. The basis of doing so too, based on latest GDP recession estimates, is unsafe given that these figures are advisory or temporary, and will be severely revised for up to the following 2 years e.g. just like when the US data was revised to show recession began in Dec.07 not mid-08, just as UK is likely to revise its recession start back to beginning July 08, while Euro zone figures are likely to be revised upwards to show recession starting not back end of last year but end of this year, 2009, or even mid-2010? UK banks' default rates are much lower than in the USA despite the UK banks' US exposures. S&P is downgrading banks to the point where they lose their unsecured borrowing grades and that is unrealistic while at the same time undoing all attempts to get interbank lending flowing more freely at lower spreads.

Jan 09 07:39 AM

[Robert Mcdo...:]

The S&P downgrades of banks' credit ratings - of those that benefit from government guarantees and shareholdings is very dubious and counter-intuitive. The basis of doing so too, based on latest GDP recession estimates, is unsafe given that these figures are advisory or temporary, and will be severely revised for up to the following 2 years e.g. just like when the US data was revised to show recession began in Dec.07 not mid-08, just as UK is likely to revise its recession start back to beginning July 08, while Euro zone figures are likely to be revised upwards to show recession starting not back end of last year but end of this year, 2009, or even mid-2010? UK banks' default rates are much lower than in the USA despite the UK banks' US exposures. S&P is downgrading banks to the point where they lose their unsecured borrowing grades and that is unrealistic while at the same time undoing all attempts to get interbank lending flowing more freely at lower spreads.

Jan 09 07:39 AM