Moody’s, the ratings agency, is reviewing the credit ratings of First Citizens Bank Limited for a possible downgrade. The agency has been conducting a broad review of global banks, so this is not entirely surprising.
Here are the comments from Moody’s, any highlighting is my own:
New York, June 02, 2009 — Moody’s Investors Service has placed the A1 long term local currency deposit rating of First Citizens Bank Limited on review for possible downgrade in light of its global review of systemic support for bank ratings in the context of the current credit crisis. As a result, Moody’s also placed on review for possible downgrade the A1 ratings for the foreign currency debt of First Citizens Bank (St Lucia) that is guaranteed by First Citizens. The bank’s C- bank financial strength rating, Prime-1 short term local currency deposit rating, and Baa1/Prime-2 foreign currency deposit ratings are not affected by this review and have been affirmed.
Government-owned First Citizens is the only bank rated by Moody’s in Trinidad and Tobago and as such is the only bank affected by the reassessment of systemic support. At present the bank’s local currency deposit and foreign currency debt ratings incorporate three notches of systemic support. “The review of First Citizens’ debt and deposit ratings will consider the extent to which the government of Trinidad and Tobago’s ability to support its banking system, should such support be needed, is converging with the government’s own debt capacity as a result of the ongoing global economic and credit crisis,” says Jeanne Del Casino, a Moody’s Vice President and Senior Credit Officer.
The rating agency believes that most governments are at least as likely, if not more likely, to support their banking systems as they are to service their own debt — a view that has traditionally led to bank ratings often benefiting from significant uplift due to systemic support. However, as the financial crisis continues, the capacity of a country and its central bank to support the nation’s banks converges with, and is constrained by, the government’s own debt capacity.
Moody’s has previously used the local currency deposit ceiling (LCDC) as the main input for its assessment of the ability of a national government to support its banks. Although anchoring the probability of support at the LCDC is appropriate in many circumstances — regarding the provision of liquidity to a selected number of institutions over a short period of time — this might overestimate the capacity of a central bank to support financial institutions in the event that a banking crisis may become both truly systemic and protracted.
The rating agency will review the specific circumstances of Trinidad and Tobago to determine the appropriate systemic support for Trinidadian bank ratings. Moody’s will reassess the level of systemic support for First Citizens to determine to what extent the systemic support incorporated in its ratings should be more closely aligned to the government’s local currency bond rating of Baa1. This approach is outlined in Moody’s special comment “Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries” available on www.moodys.com.
Factors that the rating agency will consider in its assessment of systemic support include (i) the size of the banking system in relation to government resources, (ii) the level of stress in the banking system, (iii) the foreign currency obligations of the banking system relative to the government’s own foreign exchange resources, and (iv) changes to the government’s political patterns and priorities.
Moody’s noted that the size of Trinidad and Tobago’s banking system is modest relative to the government’s resources. Credit stress in the banking system has been muted so far during the current financial crisis, though banking fundamentals are experiencing some pressure in light of the economic slowdown in Trinidad and Tobago. Government actions during past crises are indicative of the Trinidadian government’s high focus on financial system stability. During Trinidad’s financial crisis of the early 1990s, the government acted purposefully to contain the potential contagion effects of troubled institutions in the market. More recently, in February 2009, the government took control of three local financial institutions owned by CL Financial Limited, the country’s largest conglomerate, to help stem funding pressures at that company.
In affirming First Citizens’ C- bank financial strength rating Moody’s said that the bank continues to exhibit sound profitability, liquidity, and capital adequacy which position it well to cope with potential asset quality deterioration in the context of the economic downturn. Moody’s noted that the ratings review is unlikely to lead to more than a one notch change in First Citizens’ foreign currency debt and local currency deposit ratings. The rating agency expects to conclude the review over the next few weeks.