Scope Ratings today has published first-time short-term ratings on 18 large banks domiciled in seven European countries: Belgium, France, Germany, Netherlands, Spain, Switzerland and the United Kingdom. The assignment of these short-term ratings complements the earlier step of publishing long-term ratings on these banks (on 2 April 2014).

Scope’s short-term bank ratings apply to debt with a maturity of 13 months or less, as well as for other short-term financial commitments. As much of this debt is being issued on a rolling basis, Scope’s short-term ratings express a credit opinion on the issuing bank’s capacity to preserve unimpeded its debt-rolling ability, which is based to a large extent on investors’ and other market participants’ view of its timely debt-repayment capacity.

Short-term ratings and the paradox of bank liquidity
Scope said that on an average-sector basis banks display materially ampler liquidity metrics than non-financial corporations, due to bank-specific regulatory requirements and market expectations as well as to the banks’ inherent role of creating liquidity in the market as part of their activities (payments, intermediation, financial transactions, etc.).

On the other hand, the financial crisis revealed the Achilles’ heel of banks, showing how negative news headlines, tighter regulations, as well as sudden rating downgrades can lead to a sharp negative turn in market sentiment, thus harming the quality and marketability of liquid asset categories and evaporating short-term market funding sources.

Scope added that for these reasons it will remain particularly cautious with respect to short-term ratings for banks. For example, the highest short-term rating of S-1+ would be assigned essentially (but not uniquely) to banks with high Issuer Credit-Strength Ratings (ICSR) which in addition display limited reliance on funding sources vulnerable to market sentiment not only to survive but also to grow profitably.

Stronger trends in funding and liquidity for European banks
Scope noted that the crisis years saw a marked strengthening of both the level and quality of banks’ liquidity cushions as well as a reduction of funding risks – primarily in the form of less reliance on short-term confidence-sensitive funds. The rating agency attributes this to more demanding regulatory policies. More intrusive supervision, heightened market appetite for safety in bank funding and liquidity, and the banks’ own streamlined funding, liquidity and ALM strategies.

These trends are reflected in much improved liquidity and funding metrics, which Scope highlights in its general analysis, as well as specific to each bank in the published issuer rating reports.

No mechanistic correlation between short-term and long-term ratings
Scope pointed out that the analysis of a bank’s funding and liquidity is a key element underpinning both short- and long-term ratings. For short-term ratings, this aspect – including the role played by changed market sentiment – is paramount. For long-term ratings, it is part of a multi-pronged analysis, alongside other risks which may present more of a medium-term threat, rather than very short-term (doubtful business models, higher risk appetite, asset quality and capital erosion, etc.).

Given these aspects, a certain degree of short-term/long-term rating correlation exists. However, Scope does not establish strict mechanistic correlations between the two rating scales, leaving room for analytical discretion based on each bank’s short-term credit fundamentals.

More details on Scope’s analysis on short-term ratings, as well as a complete list with both the short-term and long-term ratings assigned to the 18 European banks and their outlooks, can be found in a short report titled “Introducing Scope’s Short-Term Ratings for European Banks: Focus on Funding and Liquidity”. Download full report

The following short-term ratings and outlooks were assigned:
Banco Santander: S-1 (Stable)
Barclays Bank: S-1 (Stable)
BBVA: S-1 (Stable)
BNP Paribas: S-1 (Stable)
BPCE: S-1 (Stable)
Commerzbank: S-2 (Positive)
Credit Agricole: S-1 (Stable)
BFCM (Credit Mutuel): S-1 (Stable)
Credit Suisse: S-1 (Stable)
Deutsche Bank: S-1 (Stable)
HSBC Holdings: S-1+ (Stable)
ING Bank: S-1 (Stable)
KBC Group: S-1 (Stable)
Lloyds Bank: S-1 (Stable)
Rabobank: S-1 (Stable)
Royal Bank of Scotland: S-2 (Stable)
Societe Generale: S-1 (Stable)
UBS: S-1 (Stable)

The ratings and the underlying analyses are based on Scope’s bank rating methodology supplemented by its methodology on forecasting bank financials and published at www.scoperatings.com

The ratings were not solicited by the issuers. However, in a large majority of cases the issuer has participated in the rating process. Each issuer report (which highlights the analytical underpinning for the ratings) indicates clearly these details on its front page.