S&P to update ratings for 30 main banks

18th Nov 2011 10:03

Debt ratings agency Standard & Poor's (S&P) plans to update its ratings for the world's thirty largest banks within three weeks, which could lead to some rating cuts, reports broadcaster CNBC.Bank of America, Citigroup and Morgan Stanley are among the banks that could be downgraded, said Baylor Lancaster of CreditSights.The ratings agency has been working on changing its rating methods for over a year in order to improve its accuracy and to recover its reputation."One reason there could be surprises is that the new ratings method is very complex and it has been very difficult to simulate results," said JP Morgan Chase analyst Beate Muenstermann.S&P will now use different methods to rate bank holding companies compared to other operating units. There will also be variations between short-term and long-term ratings.S&P has already said that it expects 60% of its ratings to remain the same while 20% will be raised one notch, 15% will be lowered one notch, and the remaining 5% could be lowered by two or more notches. The credit rating agency expects regional differences where Western Europe could be more affected than Latin American and Asia. The review process is expected to end this morning after which it will review smaller banks."S&P has been extremely good at guiding the market through this change in the methodology," said Muenstermann. The market has, perhaps, discounted these methodology changes.Ryan Brist, a portfolio manager at Western Asset Management, said "The rating agencies tend to be laggards compared with prices. Historically, ratings agencies tend to change their methodologies after large downward price movements in the market." Brist indicated that perhaps the changes may anticipate a turnaround for banks.John Croft, a portfolio manager and director of investment grade research at Eaton Vance, pointed out that ratings for some entities such as Lehman Brothers, ABN Amro, and Wachovia proved to be too high. "They are trying to rectify some of the problems that they have had in the past and to the extent that they do that, it is good."S.B.