April 2, 2007 / 9:42 AM / 12 years ago

Analysts welcome Moody's bank downgrade plans

LONDON, April 2 (Reuters) - Credit analysts on Monday broadly welcomed Moody’s Investors Service’s plans to downgrade 40 to 50 mainly European banks that had been upgraded under the agency’s new rating methodology, a move that had come under intense criticism. The credit ratings agency said late on Friday it had refined its joint default analysis (JDA) methodology so that assumptions about support by governments for banks that run into trouble would not play such a major role in assigning long-term ratings. It also said its analysts would have greater discretion in assigning support probabilities to banks.

As a result, it said that on Tuesday, it would put on review for possible downgrade some 40 to 50 mainly European banks, with the majority of ratings set to be downgraded by one notch, although there could be two- or three-notch cuts. The reviews will be concluded on April 10.

The original methodology was roundly criticised after it led to upgrades to triple-A for 16 European bank groups, including four- or five-notch upgrades for Iceland’s three major banks. Analysts and investors said this could devalue Moody’s ratings as it would make it more difficult to distinguish between banks’ relative credit quality. “We think investors will generally welcome the refinement as it requires less of a step-change than pre-JDA ratings,” analysts at Dresdner Kleinwort said in a note to clients.

However, they said that the initial application of the methodology had “compromised” Moody’s reputation in the eyes of the market.

Bank analysts at Royal Bank of Scotland said the potential downgrades would mean that ratings would now probably be in line with analysts’ initial expectations for the results of the methodology. They said the Icelandic banks — Glitnir GLB.IC, Kaupthing KAUP.IC and Landsbanki LAIS.IC — and Hungary’s OTP Bank (OTPB.BU) were among the candidates for three-notch cuts.

Christopher Mahoney, chairman of Moody’s credit policy committee, said that the end result would be an average rating upgrade of less than one notch from ratings prior to the implementation of JDA.

After the agency has wrapped up its reviews of the recently upgraded banks, it will resume its global rollout of the new JDA ratings, which are set to affect over 1,000 banks in over 90 countries in total.

Moody’s will announce the results of the methodology for banks in Andorra, Israel, Italy, Portugal and Spain on April 13. The whole process is set to conclude by May 11.

For Moody’s full statement, please double click on [ID:nWNA6067].

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