One man’s meat is another man’s poison. While taxpayers will no longer be asked to pay up under the new liquidation plans for bank bailouts within the European Union, the plans increase risk for shareholders and bond holders, who will suffer in a worst-case scenario.
The move has prompted a reaction from the three top rating agencies, Fitch, Moody’s and Standard & Poor’s. The agencies are reviewing the creditworthiness of major banks, and many institutions can expect to see downgrades next year. In Germany, they are particularly focused on Deutsche Bank, a financial institution whose collapse , in theory, could threaten the global financial system.
Fitch announced that in the first half of 2015, based on current information, it will downgrade Germany’s largest bank from “A+” to “A,” which is still a high-quality rating. The rating agency said the reason for the downgrade is the loss of government support as a result of new E.U. bank liquidation rules, which Germany plans to introduce early, in 2015. Under those rules, known as the Bank Recovery and Resolution Directive, primarily creditors and shareholders will pay for a bank’s liquidation.
Until now, major European banks have benefited from support from their national governments, which could not allow them to fail. Because of the assumption of government assistance, most ratings for these banks have been higher than they would be if the ratings were based solely on financial strength. This difference will be eliminated for Deutsche Bank, according to Fitch.
Until now, major European banks have benefited from support from their national governments, which could not allow them to fail.
When examining the balance sheet of Germany’s largest bank, Fitch analysts also evaluated the lender’s operational strength. Their analysis concluded that Deutsche Bank faces a number of challenges, including a structurally high cost base, rising capital requirements in various countries and persistent legal disputes, which could end in substantial fines or costly settlements.
Until these disputes are resolved, Fitch expects the bank to continue building up capital while retaining profits. Other factors in the agency’s analysis are muted market growth in investment banking and the expectation of a weak economy in Germany and the euro zone.
In its rating of financial strength, Fitch already factored in the expectation that Deutsche Bank will increase profits primarily in its stable business segments: private customers, portfolio management and payment transactions. Should the bank fail to boost profits, its financial strength would also come under pressure, the agency warned, pointing to hardly any gains in profits in the first nine months of 2014.
Moody’s also expects poorer ratings in the future. In their review, analysts at the agency said the negative consequences outweighed the more stable condition of German banks, which have strengthened their capital base, partly because of the European Central Bank stress test.
Banks shouldn’t necessarily expect better ratings because of their efforts to pass the financial stress tests.
Similarly to Fitch’s reasoning, the early implementation of the E.U. Bank Recovery and Resolution Directive, BRRD, is the main reason for Moody’s negative outlook for the German banking system, said Andrea Wehmeier, a vice president at the rating agency. And banks, she added, shouldn’t necessarily expect better ratings because of their efforts to pass the financial stress tests.
A survey of 25 banks, published by Moody’s on Wednesday, showed that 88 percent of bank managers believe the test was tougher this year than in 2011, while only 12 percent perceived it as equally challenging. A large portion of bankers – 64 percent – want to beef up capacities to master future stress tests.
S&P is also scrutinizing the ratings of banks in Germany, Austria and Great Britain. But the agency said it is waiting for additional details on the technical implementation of the new E.U. bank liquidation plans before committing to a timetable of rating actions next year.
Peter Köhler heads Handelsblatt’s banking team in Frankfurt. To contact the author: email@example.com.