Friday, March 02, 2007

Moody's Raises Banks' Bond Ratings

  
Bloomberg, Steven Bodzin and Joseph N. DiStefano, 2 March 2007

Moody's Investors Service gave its highest bond ratings to the long-term deposit and senior unsecured debt of the Royal Bank of Canada and Toronto-Dominion Bank, saying the government will back big banks if they're facing default.

The Toronto-based banks were rated Aaa by New York-based Moody's in a statement issued today. Bank of Nova Scotia, Bank of Montreal, National Bank of Canada, Canadian Imperial Bank of Commerce and Caisse Centrale Desjardins du Quebec were upgraded to Aa1. A higher credit rating can lower a company's cost of raising money by signaling lenders and investors that they face less risk.

Moody's announced new guidelines for bank credit ratings last month that consider financial strength along with any support the company may get from government and financial institutions if it gets into serious trouble. Such backing might be offered if regulators concluded the effects of a failure would be catastrophic for the nation's economy, a concept rooted in the biggest banks' financial woes in the 1980s.

``In Moody's opinion, the probability that the Canadian sovereign would support any of the six large Canadian banks in a period of extreme financial distress is 95%,'' Moody's said in the statement. The rating agency referred to six banks because Montreal-based Caisse Centrale is a cooperative.

Before the upgrades, those categories of debt at Royal Bank were rated Aa2. Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and Caisse Centrale were Aa3. National Bank's debt was rated A1.
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Bloomberg, Joseph N. DiStefano and Steven Bodzin

JPMorgan Chase & Co., Bank of New York Co. and State Street Bank & Trust Co. gained higher credit ratings from Moody's Investors Service Inc., which said the U.S. government would back the banks if they faced default.

Moody's left New York-based Citigroup Inc. and San Francisco-based Wells Fargo & Co. unchanged because their financial strength ratings -- an element of their overall ratings -- already were at the top of the scale, the New York- based service said in a statement yesterday. Moody's raised Bank of America Corp.'s rating for reasons unrelated to federal aid.

Moody's announced new guidelines for bank credit ratings last month that consider financial strength along with any support companies may get from government and financial institutions if they get into serious trouble. Such backing might be offered if regulators conclude the effects of a failure would be catastrophic for the nation's economy, a concept rooted in banks' financial woes in the 1980s.

The changes affected ``only a few banks'' in the U.S. because the nation is a ``low'' support country, Moody's said. Each of Canada's six biggest banks, including Toronto-based Royal Bank of Canada, gained higher ratings earlier yesterday because of the new criteria.

``People already feel like they're too big to fail,'' said Jonathan Hatcher, senior research analyst for corporate bonds at Delaware Investments, which holds $98 billion in corporate bonds.

Moody's gave JPMorgan, of New York, and State Street, of Boston, ratings of Aa2, a level higher than their prior Aa3. Bank of New York rose two notches to the highest rating, Aaa, from Aa2. A higher credit rating can lower a company's cost of raising money by signaling to lenders and investors that they face less risk.

The ratings service gave JPMorgan a 98 percent chance of enjoying government support because of its work clearing government securities, its extensive derivative operations and its large deposit share. Moody's assigned Bank of New York a 95 percent chance because of government clearing work and State Street a 70 percent chance because it dominates U.S. mutual fund servicing. The service rated Citigroup at 98 percent and Wells Fargo at 70 percent.

Rival credit rating firms including Standard & Poor's haven't adopted Moody's new criteria. Royal Bank of Scotland Group Plc, Dresdner Kleinwort and Societe Generale SA objected to the new system last month because it ranked Iceland's three biggest banks as better credits than ABN Amro Bank NV and ING Bank NV, citing the Icelandic government's statements in support of its banks.

Moody's made the switch to make its ratings reflect reality, said Gary Bauer, Moody's managing director for banks in the Americas.

The new policy has the potential to produce ``really interesting'' upgrades in Japan, where government support helped banks stay solvent during the 1990s, Hatcher said.

New Moody's ratings for banks in Japan, China, Australia, and other Pacific countries are due March 23. Ratings scheduled for March 9 include banks in France, Italy, Israel and Latin America.

The company upgraded Bank of America to A from A- for financial strength, lifting its deposit and senior debt ratings to Aaa. The agency said that while the government was 95 percent likely to help the bank stay solvent, its financial position gave it the highest rating without considering government aid.
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