Global Credit ResearchRating Action
12 MAR 2009
Rating Action:Valley National BankMoody's reviews US regional bank ratings
New York, March 12, 2009 -- Moody's Investors Service announced that it is reviewing for possibledowngrade the bank financial strength ratings (BFSR) of 23 US regional banks and the deposit and debtratings of 17 of these same institutions. The difference between these two figures is explained primarily byMoody's expectation of higher systemic support for certain institutions which would mitigate bank-leveldeposit and debt ratings downgrades. At the same time, Moody's has changed the rating outlook to negativefrom stable on 19 other banks. Moody's expects to complete all of its reviews by mid-May.Today's actions reflect Moody's view that the current housing and economic crisis will lead to significantlyhigher credit losses than previously anticipated. Although Moody's has been incorporating expected losseson bank loan and security portfolios into its ratings for some time, the sharp decline in commercial real estateprices, increased corporate default expectations, and unabated deterioration in residential loan performancehas led Moody's to considerably increase its loss expectations."These losses are likely to meaningfully weaken the capital position of many banks in 2009," says ManagingDirector Robert Young.The banks that are likely to be most affected by the outcome of the ratings reviews are those with significantrisk concentrations in commercial real estate, specifically construction and land development."In today's environment, it is extremely difficult for banks to generate capital, both internally through earningsand externally through private sources," says Mr. Young. "Because of this, low capital levels are anincreasing threat to banks' sustainability. Therefore, capital has become more important to Moody'sassessment of banks' stand-alone financial strength."Moody's BFSR methodology remains unchanged, though the weight attached to certain ratingconsiderations, particularly capital and future earnings prospects, has been increased to better reflect thecurrent crisis. The refinement to Moody's approach to rating banks in this environment is discussed in aSpecial Comment titled "Calibrating Bank Ratings in the Context of the Global Financial Crisis", which waspublished in February.Moody's reviews are also prompted by an overall worsening of expected economic scenarios and the ratingagency's upwardly revised loss estimations on both residential and commercial real estate loans."The current operating environment is quite similar to the most challenging risk scenario we evaluated as partof our US Banking System Outlook in June 2008," says Mr. Young. "Under that scenario, we had anticipatedthe greatest amount of ratings movement, including selective multi-notch downgrades."In addition to an assessment of the deterioration in commercial and residential real estate loans, as well ascommercial and industrial loans, the review of each bank will include a consideration of the characteristics ofits investment portfolio, focusing particularly on non-agency RMBS securities and investments in bank trustpreferred securities.SUPPORT ASSUMPTIONS EXPANDED TO MORE US BANKSMoody's also highlighted the increased probability of systemic support for large regional banks."Given the US government's specific focus on banks with more than $100 billion in assets," Mr. Young states,"we now regard the probability of government support for these large regional banks as being greater thanhad been anticipated."To this point, only three regional banks -- U.S. Bancorp, PNC and SunTrust -- previously were considered byMoody's to be potential recipients of government support, but at a level insufficient to impact their ratings.Today, following the clear demonstration of support by regulatory authorities, Moody's believes that theprobability of support has increased for an additional five institutions: BB&T, Capital One, KeyCorp, FifthThird and Regions.