Moody’s Investors Service has announced it has:
downgraded the long-term ratings of the Bank of Montreal (BMO) and its subsidiaries. BMO’s deposit rating dropped to Aa2 from Aa1 and its bank financial strength rating (BFSR) fell to B- from B.
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Moody’s Senior Vice President, Peter Routledge, said “the downgrade of BMO reflects our view that the bank’s wholesale investment bank exposes the bank to greater earnings volatility than previously incorporated in its ratings and the fact that BMO allocates substantial capital to this business…”
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The 2007-08 credit crisis exposed vulnerabilities in the wholesale investment banking business model and intensified Moody’s view of the riskiness of this business. Such vulnerabilities include risk management weaknesses, high leverage, confidence-sensitivity, excessive concentrations, and opacity of risk.
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Moody’s downgraded BMO’s preferred stock securities (which include non-cumulative preferred shares and other hybrid capital instruments) four notches to Baa1 from Aa3. The first notch reflects the downgrade of BMO’s unsupported/stand-alone BFSR. The next three notches are a consequence of implementing Moody’s revised methodology for rating bank hybrid securities which reflects the changing role of hybrids as loss absorbing capital instruments. Published in June 2009, Moody’s special comment titled “Canadian Bank Subordinated Capital Ratings” summarized the potential ratings impact of implementing this revised methodology.
There have been rumours of something like this, as I posted on Moody’s May Massacre Hybrid Ratings.
The loss absorption potential for preferreds is a matter of great pith and moment; the current system is ad hoc, but there are strong indications that the process will be formalized with Contingent Capital rules.
BMO has the following preferred share issues currently outstanding: BMO.PR.H, BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.N, BMO.PR.O and BMO.PR.P.
Not much of a reaction so far to the downgrade. One would have thought that a move of that magnitude would have elicited at least some sort of response. Does this foreshadow a change in methodology that will eventually impact DBRS ratings?
Does this foreshadow a change in methodology that will eventually impact DBRS ratings?
DBRS published its latest methodology in June, shortly after their mass downgrade of banks and contemporeniously with Moody’s first musings.
Have they done? Hard to say. In their place, I would be tempted to wait until there is some clarity with respect to future regulation – right now there’s a whole alphabet soup of organizations opining and working busily away – what’s worse, bank regulation has become a major political issue.
Since when is bank regulation a political issue, anyway? Other than the regular whining of credit card crybabies, I mean.
Thanks. I had missed that or perhaps I didn’t and just forgot about it. Nevertheless, it would appear that there’s a certain affinity between DBRS’ proposed ratings notchings and the Moody’s ratings that were announced for BMO. I wonder if the lack of reaction could be attributed to seeing these downgrades as not really a reflection of a change in credit worthiness, but more semantic in nature due to the change in methodology?
Your explanation for lack of reaction is as good as any!
Two additional explanations could be (i) complacency. If Moody’s had done this last year at this time, I rather think there would have been more reaction! (ii) disinterest. Remember when the credit crunch was the fault of the credit rating agencies, rather than the Big Bad Banks? It has become even more fashionable than ever to ignore the agencies’ pronouncements.
If it’s complacency or disinterest, then we could well be in for a very rough ride when DBRS finally releases their revised ratings under the new methodology. I suspect those won’t slip under the radar quite as easily.
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