Fitch downgraded six global trading and universal banks yesterday (Thursday) as part of a broad review of ratings of the largest banking institutions in the world. The rating agency subsequently affirmed the covered bond rating of Credit Suisse, one of the banks affected.

Credit Suisse

The downgrades included covered bond issuers: Bank of America; from A+ to A; Barclays Bank, from AA- to A; BNP Paribas, from AA- to A+; Credit Suisse, from AA- to A; and Deutsche Bank, from AA- to A+.

Fitch said the rating actions were driven by its view that the business models of banks are particularly sensitive to the increased challenges faced by financial markets resulting from economic developments as well as myriad regulatory changes. It said it had at the same time incorporated the “significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges”.

The rating agency noted that over time market conditions are likely to ease, but it expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period.

“This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs,” said Fitch.

Reshaping business models to address the challenges the banks are currently facing will be a focus for the banks over the coming two years.

“It remains uncertain which of the banks will emerge as the strongest once the new regulations are fully implemented and business appropriately adjusted,” said Fitch.

The rating agency said the banks are much better placed to deal with difficult market conditions today than in 2008. Capitalisation and liquidity are improved and vulnerabilities reduced, it said.

“These banks ensure that they have significant liquid reserves in order to be able to meet obligations even if funding markets were to close for a significant period of several months,” said Fitch.

Although the rating agency views such measures positively, it said that the liquidity position would be less of a defence against any bank-specific concerns, should they arise, because a sound liquidity profile is expected of all the banks.

Fitch today (Friday) affirmed the AAA rating of Credit Suisse’s mortgage covered bonds, with a combination of the programme’s Discontinuity Factor, the issuer’s rating, assumed recoveries, and overcollateralisation still enabling a AAA rating. Credit Suisse’s short term rating was cut to F1, and Fitch said that within two weeks of being downgraded below F1+ the issuer is expected to set up a liquidity reserve fund matching interest payments owed on the covered bonds in the next three months on a rolling basis. Fitch also expects the issuer to comply with pre-maturity test measures that kick in under the programme’s documentation once it is rated less than F1+.