CreditSights Inc., an independent bond research firm with 700 subscribing institutions, says it has stopped using European bank ratings from Moody's Investors Service because they're out of line with investor perception.
Moody's last month upgraded banks across Europe to take account of likely support from governments. The criteria pushed Iceland's three biggest banks to the top Aaa level, ahead of ABN Amro Bank NV. Glitnir Bank hf, Iceland's second-largest bank, is ranked six levels lower by Standard & Poor's. In a report titled „Moody's Makes Aaas of Itself,” New York-based CreditSights says the ratings are „worthless” for investors looking to compare bond yields. Royal Bank of Scotland Group Plc analyst Tom Jenkins in London last week published a report titled „Moody's Lose The Plot Completely.” Dresdner Kleinwort and Societe Generale SA also criticized the criteria. „Ratings agencies are sometimes accused of living in an ivory tower,” CreditSights European bank analysts Simon Adamson and John Raymond wrote. „Well, Moody's now seems to have rented the penthouse apartment there.” Adamson was Deutsche Bank AG's managing director in charge of credit research in London before he joined CreditSights in 2003. Raymond was Lehman Brothers Holdings Inc. Managing director of credit research in London until 2005.
Moody's says its new ratings should be used in conjunction with financial strength rankings for the banks. Glitnir's financial strength rating is C, two steps lower than ABN Amro's B-. „It's not in the interest of the market to ignore a major agency when they have the financial strength rating,” said Antonio Carballo, a Moody's managing director in London responsible for bank ratings. „I'm not sure why they should want to do that.”
Investors using two scales to assess risk „ain't going to happen,” said Adamson and Raymond in the CreditSights report. „Most of the market does not know or care what a BFSR is and is not going to spend time poring over the various types of rating Moody's chooses to assign.” Moody's is rolling out its new ratings region by region. The New York-based firm on March 2 gave its highest ratings to the main banking unit of JPMorgan Chase & Co., saying the government would back the biggest lenders in a crisis. Moody's may be assuming a level of support from governments that's unrealistic, according to CreditSights. The historical data Moody's uses to assess the willingness of governments to support their banks may not be a guide to future assistance. The European Union, for example, would restrict the ability of member governments to support banks, the CreditSights report said. (Bloomberg)