Moody's Investors Service may reverse credit-rating upgrades it gave banks less than a month ago following criticism from Merrill Lynch & Co., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
Moody's Investors Service yesterday backtracked from criteria that gives banks higher ratings based on the likelihood of government support in a crisis. The New York-based firm said it will decide the revised criteria by the end of this month. Moody's came under fire after it raised the grades of the three biggest Icelandic banks to the highest Aaa rating, the same as the US Treasury. Merrill analyst Richard Thomas called the ratings „perverse.” „They're going back to where they started,” said John Raymond, a London-based analyst at CreditSights Inc. The independent bond research firm said earlier this month it wouldn't use the new „worthless” ratings in a report titled „Moody's Makes Aaas of Itself.” „They're buying time. They look better doing this than if they'd come out with all the answers now.”
Moody's said in yesterday's statement it will implement the new revised form of analysis worldwide by May 18. Moody's spokesman Daniel Piels in London declined to comment. A Merrill survey found that 85% of investors believed Moody's had „lost credibility” in its bank ratings. Ben Ashby, a London-based analyst at JPMorgan Chase & Co., questioned how investors could „have faith” in the methodology. and parts of Europe.
The top Aaa scores Moody's assigned Kaupthing Bank hf, Glitnir Banki hf and Landsbanki Islands hf, Iceland's three biggest banks, are at odds with the judgment of bondholders, who demand five times higher yield premiums to lend to them than to ABN Amro Bank NV, which has a lower Aa1 ranking. Another beneficiary of the new system, called Joint Default Analysis, was Hungarian lender OTP Bank Nyrt, which received a three-step boost to Aa1. Its new rating is four steps above the rating of the government that Moody's said would rescue it in a crisis. OTP's financial strength rating is C+. „The pause is designed to pull back some of the more egregious of the outcomes,” said Thomas at Merrill Lynch & Co. in London. „There's no transparency at all now, unfortunately.”
In the way in which Moody's initially applied its new methodology, „some rating outcomes were heavily dependent on high external support assumptions,” Chris Mahoney, chairman of Moody's credit policy committee, said in today's statement. „Market participants have indicated a preference for ratings that are less dependent on such assumptions.” Moody's plans to release „adjustments” to ratings for the banks it has reviewed under the new criteria by April 10. „They may be able to claw back some of their lost credibility but it's going to take a whole lot more than a couple of weeks,” said Tom Jenkins, an analyst at Royal Bank of Scotland Group Plc in London. „All in all, though, it's a good thing they decided to wait.”
Jenkins published a report titled „Moody's Lose The Plot Completely” after the ratings firm raised the Icelandic banks. The wait may be uncomfortable for banks that may undergo sizeable changes to their ratings and probably will have to wait until April 10 when Moody's decides what ratings to assign before accessing the capital markets, he said. Glitnir spokesman Bjorn Richard Johansen declined to comment. Kaupthing and Landsbanki didn't immediately respond to e-mails seeking comment. (Bloomberg)