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Fitch Reviews 12 Global Trading and Universal Banks

LONDON & NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has today completed a periodic rating review on its Global Trading and Universal Bank (GTUB) peer group. Fitch's outlook for the industry is stable on balance. The positive rating drivers include improved liquidity, funding, capitalisation and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.

Fitch established the GTUB peer group in October 2011 as part of a broad assessment of the largest financial institutions in the world. The GTUBs comprise a group of 13 large, complex, securities trading and universal banks. Twelve of the 13 have been part of this review and the remaining banking group, HSBC Holdings PLC, will be reviewed during the next two months. Fitch has affirmed the ratings of all 12 banks and will publish separate commentaries on each of the 12 shortly. These are: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland, Societe Generale and UBS.

In Fitch's ratings framework a bank's Issuer Default Rating (IDR) is the higher of its Viability Rating (VR), which reflects a bank's intrinsic creditworthiness, and its Support Rating Floor (SRF), which reflects Fitch's opinion as to the probability of it receiving extraordinary state support. Seven of the 13 GTUBs have SRFs above their VRs. Their IDRs are sensitive to any changes in Fitch's view of the likelihood of sovereign support for G-SIFIs unless their VRs are upgraded to the same level before then.

VR Drivers

A number of recurring themes impact all of the banks in Fitch's GTUB peer group that are generally supportive of the banks' current VRs and, if progress continues, would be considered as positive rating drivers. These include increasing capital ratios, reduction in the size of assets or RWAs, declining adjusted leverage, improvements in liquidity, lower market risk appetite (at least as measured by VaR), and stabilising asset quality.

However, banks continue to face meaningful fundamental headwinds that mitigate the positive factors such as a still challenging macro-economic environment; still volatile market conditions, particularly in Europe; and a growing regulatory burden coupled with on-going regulatory uncertainty. These negative factors all affect the returns banks are able to generate, while the positives suggest that the returns will at least be more stable than in the past.

These developments have led to a variety of 'strategic reviews' designed to assess business segment competiveness and cost cutting. Each bank naturally has its own set of issues and opportunities driven largely by its business model, geographic base, competitive position and legacy performance, all of which are included in Fitch's rating assessments.

In Fitch's view earnings pressure for GTUBs will remain well into 2013 and most likely beyond. Uncertainty regarding the scope of the banks' business models and activities remains as regulation continues to evolve and rule-making is incomplete. It is difficult to judge at this stage the extent to which the total pool of revenue will be reduced and whether this will be balanced by a reduced number of banks sharing the pool.

On top of this, despite some pick-up in September, market activity is persistently low and will remain so until clarity emerges on the direction of the European and global economies. GTUBs with operations more focussed on Europe are being harder hit by lower transaction volume than those active in the U.S. or Asia. GTUBs are in the process of streamlining their securities operations to make them fit for the new regulatory environment.

GTUBs are rationalising businesses based on whether they have the potential to generate adequate earnings to cover their costs, capital and liquidity needs and exiting those that do not. Exits incur upfront redundancy and other expenses, but costs should be reduced in the medium term. Meanwhile, firms continue infrastructure investment in targeted growth areas. The cost story is further complicated by implementation of claw-back bonus schemes and having to replace bonus reduction by hikes to basic pay.

GTUBs face constant challenges in connection with litigation or operational failures such as rogue trading incidents. Despite efforts to improve risk culture and governance in these banks, the size, global scope and complexity of their business models make them particularly vulnerable to legal, operational and reputational issues. These risks are difficult to quantify and cannot be fully covered by capital or liquidity buffers. To date, costs have been met from earnings and reputational damage has been somewhat contained.

Liquidity management is high on the agenda of all GTUBs. The dependence on short-term wholesale funding is substantially reduced from pre-crisis levels, and the banks hold large liquidity buffers, made up mainly of cash and 'AAA' government securities. The stress witnessed by the French banks on their U.S. dollar liquidity in 2011 reminded the banks to monitor not only their total liquidity positions but also where it is held and in what currency.

Both the quality and amount of capital has improved for the GTUBs in general. The leverage ratio remains stronger at the U.S. banks than their European peers, but the latter are improving and are now focussed on the leverage ratio, which they were not before. On a risk-weighted basis, capitalisation ratios are more closely aligned. The sheer size of the capital bases of the larger GTUBs cannot be ignored, given the mammoth unexpected losses that would have to hit them to erode these.

SRF Drivers

While Fitch believes the broad policy goal globally is to move away from providing full support to systemically important banks, this is progressing at an uneven pace in different jurisdictions. Fitch thinks it unlikely that regulators will allow one or more large, complex and systemically interconnected banks to default while the current crisis persists and before regulation around resolution is more advanced and aligned in the primary global jurisdictions. In addition, Fitch does not think that policymakers would have the appetite to "test run" a G-SIFI through a resolution process when the global economy is at its current fragile stage and before global market conditions normalise.

In this context, Fitch is paying close attention to on-going policy discussions around bank support and 'bail in'. There has been some momentum in Europe to introduce a resolution and bail-in regime, although the draft Commission paper on this made clear that bail-in would not be enforced before 2018.

All GTUB support ratings are '1' and SRFs are 'A+' for German and French GTUBs and 'A' for U.S., UK and Swiss GTUBs. The slightly higher SRFs for the German and French banks reflect a still slightly stronger political will to support banks in those countries - there are no such statements as in Dodd Frank in the U.S. or discussions about ring-fencing operations as in the UK. Nor are the banks so large in relation to the economy as in Switzerland. Nevertheless, if the sovereign rating on either Germany or France were downgraded by one notch to 'AA+', the SRFs of the country's major banks would also likely be downgraded by one notch to 'A'. In the GTUB group, the Negative Outlook on France is reflected in the Negative Outlook on Societe Generale, whose IDR is at its SRF, while BNP Paribas' IDR is based on its 'a+' VR and has a Stable Outlook.

Fitch Ratings will host a teleconference at 10:00 a.m. ET / 3:00 p.m. London time to discuss these actions and Fitch's outlook further, and to take questions from market participants. The call-in information is:

--North America Dial-In: +1 877-467-8597

--EMEA / Asia Dial-In: +1 706-643-6296

--Conference ID: #40180088

Additional information is available at 'www.fitchratings.com'.

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Source: Fitch Ratings