Bank Downgrades

by Larry Levin 

A would-be stunner hit the tape today...AFTER THE CLOSE, of course.  Fitch released a report saying it put many banks on "watch negative" while others were outright downgraded.  The reason for the action: "the ongoing Eurozone crisis continues to feed intense market speculation regarding the potential or bank recapitalization schemes. Therefore for the near term the agency is maintaining a 'single A' range support rating floors for banks in its highest rated Eurozone countries."
 
LONDON/MILAN, October 13 (Fitch) Fitch Ratings has downgraded UBS AG's (UBS) Long-term Issuer Default Rating (IDR) and revised its Support Rating Floor (SRF) to 'A' from 'A+'. The Outlook on the Long-term IDR is Stable.

At the same time, the agency has downgraded UBS's Short-term IDR to 'F1' from 'F1+' and affirmed UBS's Support Rating at '1'. UBS's Viability Rating (VR) of 'a-' remains on Rating Watch Negative (RWN). This rating action has no impact on the 'AAA' rating of the outstanding covered bonds issued by UBS. A full list of rating actions is at the end of this comment. The rating action on UBS and its subsidiaries is part of Fitch's broader review of changing sovereign support in developed countries announced in separate comments titled 'Rating Banks in a Changing World' and 'Fitch Comments on Support for Euro Banks; Takes Various Support-Driven Rating Actions' both published on 13 October 2011 and available on www.fitchratings.com.
 
Since the intervention of the Swiss authorities in late 2008, UBS's IDRs have been based on Fitch's view of the availability of sovereign support. As a result, the Long-term IDR has been at the SRF. Reflecting the particularly close ties between UBS and the Swiss government following the transfer of a USD38.7bn portfolio of assets to the Swiss National Bank (SNB) StabFund in late 2008 and early 2009, UBS's SRF has since early 2009 been rated one notch above the SRF for Credit Suisse AG (CS), the other large, systemically important Swiss bank.
 
Fitch's rating action on UBS's SRF reflects Fitch's view that the one notch uplift for close affiliation with the Swiss state is no longer warranted and the agency has therefore lowered UBS's SRF to 'A' in line with its SRF for CS. Consequently, Fitch has downgraded UBS's Long- and Short-term IDRs to 'A' and 'F1' respectively. UBS's Viability Rating (VR), on Rating Watch Negative (RWN) since 16 September 2011 (see "Fitch Places UBS's Viability Rating on Rating Watch Negative; Affirms IDRs" dated 16 September 2011 at www.fitchratings.com), remains unaffected by today's rating action. UBS's SRF and IDRs continue to be based on Fitch's view that there is an extremely high probability of support for UBS from the Swiss authorities at least until the global financial sector has stabilized and resolution regimes in Switzerland and abroad are in place. In Switzerland, legislation attempting to avoid taxpayers having to bail out one of its systemically important banks again ("too big to fail", TBTF, legislation) is currently being finalized. The legislation centres around strengthening banks' capital positions, imposing more stringent liquidity requirements, improving risk diversification and adjusting banks' organizational set-up to allow for the protection of systemically important utility functions in the event of a bank insolvency or threatened insolvency.
 
And the market's reaction since this was released?  "Survey SAYS?!  UP +1.75!" Yes, even bank downgrades are BULLISH.  (The full report can be read at www.fitchratings.com)

 

Trade Date: 10/13/11

E-Mini S&P Trades*

(before fees and commissions):

1. Pivot sell @ 2:09pm at 1202.00 = +.75 & +0.50 (2 lots)

2. Algorithm positions (4)

3. "Reading the Tape" positions (2) ...combined Secret's, Algo, & "Reading the Tape" total...-0.75 

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