DBRS Downgrades Preferred Shares and Hybrid Instruments of European Banks

DBRS has today downgraded ratings for preferred shares and hybrids for European banks. The downgrades reflect DBRS’s view that for banks there is an elevated risk of nonpayment of preferred dividends (which DBRS defines as a default on these instruments) relative to the risk of default indicated by senior ratings than in the past.

This conclusion reflects DBRS’s concern that banks and their regulators in Europe and elsewhere have become much more focused on conserving capital, particularly common equity, which may be achieved in part by the suspension of preferred dividends. Today’s action also reflects the increasing importance being placed on common equity in the capital structure by regulators and the financial markets that could lead to adverse action on preferreds. One consequence is that the starting point in rating preferred shares and hybrids becomes the intrinsic assessment, rather than the final rating, which benefits from implicit systemic support by typically a notch for SA2 banks. Preferred shares and hybrids are very unlikely to benefit from systemic support and do not benefit from any implied support. The application of DBRS’s methodology has resulted in a generally fixed relationship across rating categories between preferreds and senior issuer ratings, with some flexibility. Today’s actions reflect a revision to DBRS’s methodology whereby the notching has been increased at even the strongest rating categories and expanded as the credit quality of a bank migrates downwards. Within this approach, there remains the flexibility to adjust the notching for factors that reflect the position of individual banks.

Today’s actions apply only to preferred shares and hybrids that DBRS rates as listed below. Other ratings for these issuers remain unchanged. Importantly, the actions do not reflect any issuer specific credit events. Related rating trends and Under Review placements also remain unchanged.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.