PrefBlog

Moody’s Investor Services has announced:

placed all the long-term ratings of Royal Bank of Canada, including its Aaa rating for deposits, on review for possible downgrade. Royal Bank’s unsupported bank financial strength rating is rated B+, which maps to a Aa2. Royal Bank is rated Aaa for long-term deposits and senior debt, two notches higher than its unsupported ratings, because of Moody’s very high systemic support assumptions. The bank’s Prime-1 short-term ratings were affirmed.

During its review Moody’s will focus on Royal Bank’s commitment to capital markets and its growth plans for the business. Moody’s will also examine the bank’s controls on these businesses, including its limits on position concentrations and less-liquid assets.

On an industry basis, Moody’s believes wholesale banking activities poses heightened risks including those associated with concentrated positions, high levels of leverage, confidence sensitivity and opacity. Capital market activities expose bondholders to extreme events or “tail risks” if controls fail. Tail risk is difficult to measure and makes management of a global capital markets businesses especially challenging. Moreover, as market conditions improve and competitive pressures increase, managers at investment banks may relax their disciplines and venture into more complex products.

On a firm-wide basis, RBC management has expressed a strategic target to maintain a 25 to 30% earnings contribution on average from the capital markets segment, which Moody’s considers high for a B+ BFSR bank. Moody’s noted Royal Bank’s growth plans include select hiring of professionals and a growing contribution of revenues from outside Canada.

“Royal Bank and many other investment banks have recently de-risked, but shareholder demands will inevitably cause firms to increase risk and complexity over the next market cycle” said Peter Nerby, a Moody’s Senior Vice President.

This news about risk appetite will make Mr. Carney sad. Fortunately, the rest of us know this already.

On Review for Possible Downgrade:

• …
• Issuer: Royal Bank of Canada
  • …
  • Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently A2

Outlook actions:

• …
• Issuer: Royal Bank of Canada
  • Outlook, Changed To Rating Under Review From Negative(m)

RY has a host of preferred shares:
FixedResets

• RY.PR.I
• RY.PR.L
• RY.PR.N
• RY.PR.P
• RY.PR.R
• RY.PR.T
• RY.PR.X
• RY.PR.Y

PerpetualDiscount

• RY.PR.A
• RY.PR.B
• RY.PR.C
• RY.PR.D
• RY.PR.E
• RY.PR.F
• RY.PR.G
• RY.PR.W

The agencies are becoming increasingly concerned about banks’ exposure to dealing. Moody’s downgraded BMO an extra notch on these grounds in January.

This entry was posted on Tuesday, September 14th, 2010 at 5:55 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.