RBC’s credit rating gets downgraded

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This article was published 22/06/2012 (4965 days ago), so information in it may no longer be current.

TORONTO — Moody’s Investors Service has cut the credit ratings of 15 of the world’s largest banks, including the Royal Bank (TSX:RY), Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs.

The ratings agency said Thursday it was especially concerned about banks with significant financial-markets businesses because those markets have become so volatile. Some of the largest European banks were also downgraded, including Barclays, Deutsche Bank and HSBC.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” said Greg Bauer, Moody’s global banking managing director.

“However, they also engage in other, often market-leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.”

A downgrade usually means it becomes more costly for banks to raise money by selling debt. Investors demand higher interest for riskier debt, which is what the downgrades represent.

Moody’s cut Royal Bank’s long-term deposit rating to Aa3 from Aa1.

However, the agency noted RBC has stronger buffers than many of its peers in the form of earnings from other, generally more stable businesses.

“RBC is a strong and diversified universal bank with sustainable leading market shares across many retail products and services in its home market,” the Moody’s report said, noting it has the lowest earnings volatility in the global investment banking peer group.

The lone Canadian bank on the list said the downgrade will not affect its clients.

“RBC remains one of the strongest and highest-rated banks in the world. That category crosses a number of classifications in terms of credit ratings, in terms of capital base and in terms of balance sheet,” the bank said.

The review followed a move by Moody’s to downgrade Royal Bank to Aa1 from Aaa in December 2010 due to the bank’s capital-markets exposure.

Royal Bank earned a first-quarter profit of $1.86 billion, or $1.21 per share, compared with $1.95 billion or $1.27 per share.

The downgrades come at a time of great uncertainty in the global economy. Europe’s currency union is under threat from bad bank loans. The U.S. economy is slowing and the fast-growing emerging economies of India, Brazil and China are also cooling. Financial markets have also been volatile.

Royal Bank is the country’s largest bank by assets and market capitalization, and has 77,000 employees serving more than 18 million clients.

— The Canadian Press