FINANCIAL INSTITUTIONS

Bank Risk Report

SECTOR IN-DEPTH
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TABLE OF CONTENTS
US financial institutions
Non-US financial institutions
Market-implied ratings tables for global
banking regions and companies
Monthly Bank Risk Report: key credit
metrics: CDS, bonds
Appendix : Moodys Capital Markets
Research recent publications on the
finance sector

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ANALYST CONTACTS
Allerton G. Smith
212-553-4058
Sr Dir-Sr Research Analyst
250 Greenwich Street
allerton.smith@moodys.com
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Bank Market Signals Reflect Continued

Stresses
US Financial Institutions: Challenges to Profitability Underlie Credit
Spread Movements
By Allerton (Tony) Smith
Over the last year the market-implied ratings for US banks slightly underperformed the broad
market. The average CDS-implied rating for the 12 banking companies which we cover in
this report has slipped from A3 to Baa1. The average bond-implied rating for the 39 banking
companies which we cover in this publication also worsened by one notch from A3 to Baa1.
Investor concerns about bank profitability and the continuing market shocks from sizeable
regulatory fines and settlements have likely been the main impediments to the banks credit
market signals. Profitability metrics within the US banking system are returning toward precrisis levels but only slowly, and net income actually declined in 2014 for the largest US
banks. This trend reflects numerous challenges for all of the banks.
We do expect profitability to benefit from a slowly rising interest rates, continued loan
growth, and the finalization of regulatory fines and settlements. The improving balance
sheets of the US banks are likely to support consistency in US banks credit spreads, keeping
them relatively stable and range bound for the near future.
The average CDS five-year mid-spread for our 12-bank peer group widened from 55 bp a
year ago to 59 bp, and this modest 6% widening slightly underperformed the broad market.
CDS spreads widened for nine of the 12 banks over the last year; just three banks enjoyed a
tightening. The average senior debt ratings for our CDS and bond bank peer groups are both
A3, thus the average CDS- and bond-implied ratings gaps deteriorated by one notch to -1
notch over the year. As recovery in profitability levels and consistency returns, the marketimplied ratings and the Moodys ratings for our bank peer groups could converge.
Moodys Investors Service recently noted: The outlook for US banks is stable. GDP growth,
low oil prices, and rising employment will bolster already strong asset quality. However, low
interest rates and competition among banks and from the shadow banking sector will keep

Moodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets
Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or
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banks margins and profitability low over the next 12-18 months. Intense competition also raises the risk that banks will relax
underwriting standards, leaving them with higher-risk loans on their balance sheets. 1
Challenges from the regulatory and operating environment were evident in 2014
Net income fell on average by 8.5% for the 10 largest US banking companies in FY 2014 (Figure 1). The largest banks profitability
growth underperformed their larger peer group of 65 banks shown in the expanded tables below. Six of the 10 largest US banks
reported a rise in profitability in FY 2014, but trends for revenues remained lackluster. Weighing on profitability were higher legal and
regulatory settlements, regulatory compliance costs, sluggish trading revenues, intensifying competition, and net interest margins
pressured by the persistent low interest-rate environment. A positive offset in 2014 was a continuing decline in the provisions for loan
losses, although this benefit is waning.
FIGURE 1. TEN LARGEST US BANKING COMPANIES, RANKED BY NET INCOME BEFORE EXTRAORDINARY ITEMS, AT 12/31/14

2104 earnings improved at the 65 largest US banking companies

The aggregate net income for the 65 largest US banks declined by 4.5% at FY 2014 versus FY 2013. However 2014 it rose by 6.4%
from the aggregate level reported in 2012.
More US banks are profitable
More banks are reporting profitable operations. Of the top 65 US banks, 63 reported positive net income in 2014 and 2013, versus just
61 in 2012. This constructive trend is likely to continue and even improve in FY 2015.
Problem loans drop further at US banks2.
The ratio of problem loans to gross loans strengthened significantly over the last several years for the largest US banking companies.
The ratio fell by 19% from year-end 2013 to year-end 2014, strengthening from 2.41% to 2.02%. The ratio fell by 10.5% between 2012
and 3013, from 3.02% to 2.41% (Figure 2).

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FIGURE 2. TEN LARGEST US BANKS RANKED BY THE RATIO OF PROBLEM LOANS TO GROSS LOANS3

Among the largest US banking companies, the best drop in the ratio of problem loans to gross loans in 2014 was 24%, at both Bank of
America Corp. and JP Morgan Chase & Co.
The ratio of problem loans to gross loans has recovered by 15% since the end of 2012 for the 65 largest US banking companies.
Sixty of the 65 largest US banking companies experienced an improvement in the problem loan to gross loan ratio in FY 2014. Fifty
nine of the banks demonstrated an improvement in the ratio in FY 2013. No bank reported a worsening of the ratio in both 2014 and
2013.
Total assets are rising at US Banks
Total assets grew by 9.4% at the 65 largest US banking companies in FY2014. The rate of growth accelerated from a rise of 2.9% in the
2012-2013 period. Sixty of the top banks showed an expanded asset base in 2014 versus only 43 banks in 2013. Nominal GDP grew at
3.9% in 2014. We attribute the spurt of bank assets to rapid deposit inflows, deployed into more robust commercial loan growth (up
10% in 2014) and to the banks additions to investment portfolios of low risk weighted securities.
Top 10 US banks remain an elite group
The ten largest (by total assets) US banking companies at year-end 2014 are the same as the ten largest at year-end 2013 (Figure 3).
The group grew more slowly in 2014 (3.0%) and 2013 (1.6%) than the larger peer group of 65 rated US banking companies (where
asset growth was 9.4%).
FIGURE 3. TEN LARGEST US BANKING COMPANIES RANKED BY TOTAL ASSETS FY 2014

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Four largest banks maintain their asset size positions

JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo & Company were the four largest US banking companies (in that order,
by total assets) in 2014, 2013, and 2012. Reflecting pressures from Dodd-Frank regulations, total assets shrank in 2014 at the broker
dealers, with a drop of 6% in total assets at Goldman Sachs and 4% at Morgan Stanley.
Shareholders equity is rising at US banking companies
Shareholders equity continued its growth trend at the largest US banking companies, rising on average by 8.4% in FY 2014 and 5.1% in
FY 2013 (Figure 4).
FIGURE 4. TEN LARGEST US BANKING COMPANIES RANKED BY SHAREHOLDERS EQUITY

Top 10 US banks continue to top all peers for shareholders equity

The same ten US banking companies, as ranked by shareholders equity, were at the head of their peers in 2014, 2013, and 2012.
Most banks are growing their capital positions
Fifteen of the largest US banks had a drop in shareholders equity in 2013, but only five experienced a decline in 2014. Only one bank,
Fulton Financial, had a dip in shareholders equity in both 2013 and 2014.
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Non-US Financial Institutions: Market Signals Reflect Local Operating Environments

By Allerton (Tony) Smith
Credit spreads for banks outside the US did not perform as well, in general, as for the US banks over the last 12 months. In Europe, the
average CDS spread widened by 28% from 132 bp to 170 bp over the last year. In the EMA region, the average CDS spread widened
from 466 bp to 1,055 bp, in Africa average CDS spreads widened by 23% from 128 to 158 bp, and in South America average CDS
spreads widened by 29% from 201 to 258 bp. The best performing region was Asia-Pacific where CDS spreads tightened by 6% from
134 a year ago to 125 bp.
Bond-implied ratings gap movements for banks outside the US were mixed. The gap for the EMA (including Hungary, Poland and
Ukraine) banks worsened by -4 notches, with the bond-implied rating changing from Ba2 to B3. The gap for Asia-Pacific banks slipped
by two notches, with the bond-implied rating changing from A3 to Baa2. For African and Middle Eastern banks the bond-implied rating
was unchanged from a year ago at Ba1. As a region South American banks and European banks each enjoyed a +1 notch improvement
in its average bond-implied ratings gaps, with South America changing from Ba3 to Ba2, and Europe from Baa1 to A3.
The highest and lowest rated banking companies globally
The four tabulations (Figures 5-8) below show the 10 best and 10 worst banking companies rated by Moodys, as ranked by their
CDS- and bond-implied ratings. The lowest ratings come mostly from well-known troubled regions and countries, such as Ukraine,
Kazakhstan, and Greece. These are rounded out by some special situations in Russia, Italy, Argentina, and Portugal, plus Ally Financial
and CIT in the US. The best bond-implied ratings come from banks in Europe and Canada.
The CDS- and bond-implied ratings gaps for the 10 lowest ranked banking companies show relatively close agreement between their
market-implied ratings and their Moodys ratings, as do the bond-implied ratings gaps for the 10 highest ranked companies. However
the CDS-implied ratings gaps for the 10 best ranked banks range from -4 notches to -6 notches. In large part this reflects the extreme
compression between the CDS five-year mid-spreads at the top of the credit spectrum, but also likely reflects some investor caution
about the highest-rated banks versus similarly rated corporate bond issuers.
FIGURE 5. TEN LOWEST MOODYS-RATED BANKS WITH BOND-IMPLIED RATINGS

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FIGURE 6. TEN HIGHEST MOODYS-RATED BANKS WITH BOND-IMPLIED RATINGS

FIGURE 7. TEN LOWEST MOODYS-RATED BANKS WITH CDS-IMPLIED RATINGS

FIGURE 8. TEN HIGHEST MOODYS-RATED BANKS WITH CDS-IMPLIED RATINGS

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End Notes:
1. Excerpted from Banking System Outlook, June 1, 2014. https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1004697
2. The compilation includes the 65 largest US banking companies with credit ratings from Moodys Investors Service at 12/31/14.
3. Data as reported from Moodys Credit View Bank Financials and Analytics. Figures in green indicate improvement or growth, figures in red indicate worsening or declines.

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Market-implied ratings tables for global banking regions and companies

FIGURE 1. AVERAGE CDS-IMPLIED RATINGS FOR GLOBAL BANKING COMPANIES BY REGION.

FIGURE 2. AVERAGE BOND-IMPLIED RATINGS FOR GLOBAL BANKING COMPANIES BY REGION.

FIGURE 3. MAJOR GLOBAL BANKS CDS- AND BOND-IMPLIED MARKET SIGNALS AND MOODYS RATINGS

Figures 1,2, and 3: Moodys Senior or Moodys Sra. (Moodys senior rating algorithm)
Source:: Markit; Moodys Analytics

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Monthly Bank Risk Report: key CDS credit metrics

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Monthly Bank Risk Report: key bond credit metrics

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Appendix: Moodys Capital Markets Research - recent publications on finance sector

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https://www.moodys.com/research/Market-Signals-Review-GECCs-CDS-and-Bond-Implied-Ratings-Converge-PBM_1005628

https://www.moodys.com/research/Market-Signals-Review-Genworth-All-Three-Market-Implied-Ratings-Remain-PBC_1005175

https://www.moodys.com/research/Bank-Risk-Report-Globally-Bank-Market-Signals-Reflect-OperatingEnvironments--PBC_1004989

https://www.moodys.com/research/Market-Signals-Review-Ally-Financials-Market-Signals-Were-Idiosyncratic-Over-PBC_1005152

https://www.moodys.com/research/Market-Signals-Review-AXA-SA-Implied-Ratings-Move-in-Narrow-PBC_1005108

https://www.moodys.com/research/Market-Signals-Review-Ocwens-Market-Implied-Ratings-Slip-Lower-PBC_1005050

https://www.moodys.com/research/Market-Signals-Review-Health-Net-Inc-Market-Signals-Mostly-Steady-PBC_1004941

https://www.moodys.com/research/Market-Signals-Review-BBT-Corporation-EDF-Implied-Rating-Advances-PBC_1004878

https://www.moodys.com/research/Market-Signals-Review-Morgan-Stanleys-EDF-Implied-Rating-Rises-to-PBM_1004866

https://www.moodys.com/research/Market-Signals-Review-Citigroup-Inc-Two-Market-Implied-Ratings-Rise-PBM_1004804

https://www.moodys.com/research/Market-Signals-Review-Bank-of-America-All-Market-Signals-Retreat-PBC_1004735

https://www.moodys.com/research/Market-Signals-Review-Goldman-Sachs-EDF-Implied-Rating-Rises-CDS-PBC_1004696

https://www.moodys.com/research/Market-Signals-Review-JPM-All-Three-Market-Signals-Rally--PBM_1004592

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AUTHORS
Allerton (Tony) Smith
Senior Director
allerton.smith@moodys.com

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EDITOR
1.212.553.4058

Lisa Hintz, CFA

Associate Director
lisa.hintz@moodys.com

1.212.553.7151

Irina Baron
Asst. Dir-Research Associate
irina.baron@moodys.com

1.212.553.4307

Xian (Peter) Li
Research Analyst
xian.li@moodys.com

1.212.553.1404

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Dana Gordon
Assc Dir-Senior Editor
dana.gordon@moodys.com

CLIENT SERVICES
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Americas
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