RBC Down Grade, again?

Just over a year after it was initially downgraded, Royal Bank of Canada is at risk of another slash to its credit quality as Moody’s Investors Service reviews all major global banks with big capital markets divisions.

The rating agency has initiated a review of 17 banks and securities firms with global capital markets operations because it feels that the risks associated with these divisions “are not fully captured in their current ratings.”
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“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” the rating agency said. “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.”

“Rapidly changing risk positions expose these firms to unexpected losses that can overwhelm the resources of even the largest, most diversified groups.”

RBC was already dinged for its exposure to capital markets in December 2010, when Moody’s downgraded its credit rating to Aa1 -- which is stil a stellar rating.

But much has changed since then, and Moody’s thinks its worthwhile to re-evaluate.

“The combination of changed operating conditions and increased regulatory requirements and restrictions has diminished these firms' longer-term profitability and growth prospects,” the agency said. “While we had initially expected their standalone credit profiles to recover once the acute phase of the crisis had passed, we now view these challenges as structural features of global investment banks.”

In an e-mailed statement, RBC said it was “surprised” to be included in the review and the banks believe is inclusion “is unwarranted.”

“This action does nothing to help investors differentiate between strong banks and weak ones. RBC’s credit rating and capital base are among the strongest of all banks globally,” RBC said. “Over the past three fiscal years, our capital markets business has been consistently profitable and represents less than 25 per cent of RBC's earnings.”

10 of the 17 firms that Moody’s will inspect have been her placed on review for downgrade, or had their reviews for downgrade extended. Along with RBC (RY-T53.24-0.12-0.22%), the firms placed under review include U.S. giants such as Bank of America (BAC-N8.03-0.06-0.74%), Citigroup (C-N32.990.280.86%), and JPMorgan Chase (JPM-N38.480.481.26%).

Moody’s goes so far as to break the firms it will review into different categories, with some susceptible to one-notch downgrades, and others susceptible to more. RBC is susceptible to two-notch downgrades, while Credit Suisse, Morgan Stanley and UBS could all face three-notch downgrades.