July 2 (IFR) - The markets may have dismissed the recent
decision by Moody's to downgrade 15 of the world's largest
banks, but the influence of international ratings agencies is
here to stay.
The lack of objective information sources, as well as
falling investment in research, is expected to ensure the
agencies play a vital role in global financial markets.
After Moody's announced its much-anticipated cuts, the
affected banks said the agency was wrong about the health of the
US banking industry.
Citigroup called its downgrade "arbitrary and
completely unwarranted", and railed against a
"disproportionately adverse treatment of US firms relative to
banks in Europe". It said the US financial system was stronger,
not weaker, than before the crisis.
RBS also protested, calling the Moody's action
backward-looking, while Morgan Stanley said the downgrade
did not fully reflect the key strategic actions it had taken in
The banks were not alone in their criticism. One banker said
that some fund managers were increasingly asking clients for the
flexibility not to peg investments to credit ratings.
One questions raised is whether the market should continue
to be as reliant on ratings decisions. Many think the answer is
clearly no; and while credit spreads, stock prices and CDS of
the downgraded banks reacted positively to the Moody's
downgrades, some believe the influence of the agencies may not
Citi alluded to this in its response, saying that market
participants had become more sophisticated in their credit
analysis in recent years, and that few react solely on ratings -
particularly from a single agency - to make credit decisions.
But it added that some clients and investors would be
affected by the Moody's decisions in view of their historical
reliance on such ratings as fiduciary advice.
"Like it or not, international ratings agencies are here to
stay," said Mike McGonigle, head of credit research at global
investment management company T Rowe Price, which manages
US$550bn in assets.
"We always use our own internal ratings and analysis to
determine our investment strategies," he said.
"If international ratings agencies were not around, we would
still do well. But what would worry me then is the risk of
operating in a market that is less disciplined - and lacks this
McGonigle said that investment in research has dwindled over
the years, especially as institutions have grappled with slowing
supply while regulators have imposed restrictive investment
rules to reduce systemic risk.
On the buyside, internal due diligence of credit risk is
still important for top fund managers, but many lack sufficient
resources to rely on it. Information provided by S&P, Moody's
and Fitch - deemed to be independent of the sellside - thus has
a ready market.
For the first quarter of 2012, Moody's reported revenues of
US$646.8m compared with US$577.1m a year earlier. Global revenue
for Moody's Analytics for the first quarter of 2012 was
US$194.1m, up 18% from the first quarter of 2011. Revenue from
research, data and analytics increased by 9% from the prior-year
period, primarily due to increased sales of credit research and
This rising influence of "independent research" by ratings
agencies thus means that credit rating decisions are achieving
an added level of importance in current markets.
"Instead of drumming up rhetoric, market players should
understand that every model has conflicts, which is not an issue
if that is visible and understood," said one ratings agency
"The market should ideally be at the mid-point of being too
influenced by ratings and completely ignoring what a ratings
agency has to say, but that is an ideal world."