DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications

DBRS Ratings Limited and DBRS, Inc. (collectively, DBRS) has today placed Under Review with Negative Implications the ratings of certain subordinated debt of 27 European banking groups. The rating action affects only the higher rated subordinated debt in European banks’ capital structure, and reflects the increasing likelihood that holders of this debt are now likely to bear losses at the same time as lower rated subordinated debt of banks that come under financial stress. Rating downgrades are expected to be limited to one notch and the review period is likely to take no longer than 90 days.

In total 29 banking groups are affected, as the ratings of 2 banks are already under review for separate reasons.

DBRS currently rates existing dated subordinated debt and cumulative junior subordinated debt of European banks one notch below the Intrinsic Assessment (IA), while non-cumulative junior subordinated debt is rated two notches below the IA. However, given the increasing likelihood that all subordinated debt will be used to absorb losses alongside equity under the European Union’s Bank Recovery and Resolution Directive (BRRD), DBRS has placed Under Review with Negative Implications the subordinated debt that is currently rated only 1 notch below the IA. One potential outcome of the review is that these instruments would be downgraded to the same level as existing non-cumulative junior debt (i.e. 2 notches below the IA).

The rating action is in line with the existing DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016).

DBRS has also included Swiss banks in its review, as a similar direction is evident in the evolution of the treatment of subordinated debt holders in Switzerland. This review is restricted to European banks. DBRS does not currently see similar rating pressure on rated subordinated debt in the USA, Canada or Asia-Pacific, given the different regulatory regimes in these countries.

The subordinated debt ratings of Intesa Sanpaolo SpA and Caixa Geral de Depositos S.A., which are already Under Review with Negative Implications for separate reasons, remain under review as a result of today’s rating action.
DBRS has not made any further changes to its existing senior debt and deposit ratings of European banks at this time. As outlined in DBRS’s July 2016 commentary, Developments in European Bank Resolution Frameworks and their Impact on Bank Creditors, DBRS continues to avoid overly precise assumptions about the possible nature of a future resolution, as under BRRD national resolution authorities still have significant discretion to adjust the bail-in process.

RATING DRIVERS
The ratings are Under Review with Negative Implications as discussed above.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria: Guarantees and Other Forms of Support (February 2016), and DBRS Critical Obligations Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, the European Commission and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

These ratings are under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

For full rating committee disclosures see: <a href="http://www.dbrs.com/research/304612/subordinated-debt-review-disclosures.pdf" target="blank">