Amid concerns about the rising threats to profitability facing global investment banks, Moody’s Investors Service has put Royal Bank of Canada’s rating under review.
The move comes as part of a broader move to examine 17 banks and securities firms with global capital markets operations. The rating agency says that the review is based on its view that these firms, “face challenges that are not fully captured in their current ratings”.
Moody’s said Wedesday that capital markets firms are confronting evolving challenges, “such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.”
Along with changing operating conditions, firms are also facing increased regulatory requirements and restrictions, which impacts profitability and growth prospects too, it notes. “While we had initially expected their standalone credit profiles to recover once the acute phase of the crisis had passed, we now view these challenges as structural features of global investment banks,” it says.
RBC (TSX:RY) is the only Canadian firm included in the review, which also involves nine European firms, and U.S. giants, Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, and Morgan Stanley. It says RBC, along with most of the firms being reviewed, could face a revision of up to two notches; while Credit Suisse, Morgan Stanley, UBS could see moves of up to three notches; and a handful of them are only facing a potential one notch move.
During its review, Moody’s says it will consider the structural vulnerabilities in the business models of global investment banks, which include the confidence-sensitivity of customers and funding counterparties, risk-management and governance challenges, as well as a high degree of interconnectedness and opacity.