London, 9 October 2014 – Scope Ratings, the European credit rating agency, has today published first-time ratings for more than 45 capital instruments of 11 banks in six EU countries and in Switzerland. The ratings range from BB to BBB for Additional Tier 1 (AT1) securities and from BBB to A for Tier 2 (T2) securities.

There has been a large increase in issuance of capital instruments by European banks since the tail-end of the crisis and further issuance can be expected into 2015 as banks remain focused on strengthening further their regulatory capital and also boosting their loss-absorption capacity (LAC). The rating actions and research will provide new details for the market’s ongoing assessment of the various risks of these securities.

The rating actions are supported by 19 detailed individual analytical reports on the specific AT1 and T2 securities and only apply to those securities which are compliant with Basel 3/CRD 4 and therefore exclude hybrid securities issued before the crisis. The ratings and analyses are based on Scope’s finalized rating methodology for bank capital instruments published last month and which can be downloaded from www.scoperatings.com.

“The issuance of capital instruments and the terms and conditions of these securities are essentially driven by their role in strengthening banks’ capital positions, providing a viable private-sector alternative for recapitalization. Both AT1 and T2 securities are subject to principal loss absorption risks and in addition AT1 securities are also exposed to coupon cancellation risks,” highlighted Pauline Lambert, senior bank rating analyst and principal author of the methodology.

When rating AT1 securities, Scope has assigned at least two notches down from the issuer credit-strength rating (ICSR) for inherent coupon cancellation risks and at least two for inherent principal loss absorption risks. Scope also highlights the possibility of additional notching down – beyond the minimum of four notches – due to either security- or issuer-specific factors. These include the level of the trigger, the distance to trigger and to the combined buffer requirement, the status of the issuer within the group, the issuer’s liability and capital structure, as well as specific regulatory requirements or guidelines.

Importantly, Scope does not assign so-called equity credit for issuers’ AT1 securities and then based on such metrics to make adjustments to banks’ capital positions, considering that in fact it is regulatory metrics and not rating agency-adjusted capital that matter when assessing whether an issuer requires prompt regulatory action (the main driver of default-like scenarios for banks).

For T2 securities, Scope’s ratings are at least one notch below the bank’s ICSR, as the agency considers these securities to be in essence regular subordinated debt. However, additional notching down has been warranted in some instances due to specific factors, mostly due to the existence of a high trigger.

Rating overview:

KBC (AT1): BB+

KBC (T2): BBB

Credit Agricole (AT1): BB

Credit Agricole (T2): BBB+

SocGen (AT1): BBB-

Deutsche (AT1): BB

BBVA (AT1): BB+

Santander (AT1): BB+

Credit Suisse AG (T2): A

Credit Suisse Group AG (AT1): BBB-

Credit Suisse Group AG (AT1): BBB

Credit Suisse Group AG (T2): BBB+

UBS (T2): A-

Barclays (AT1): BB

Barclays (T2): BBB+

HSBC (AT1): BBB

Lloyds (AT1): BB+

These ratings were not solicited but in a majority of cases the issuers have participated in the rating process.

The table on page 2 of the complete report provides details on the ratings being assigned by Scope and on the main factors underpinning them.

The research reports on the rated securities also highlight (i) how differences in the structures of these securities are often driven by regulatory demands, (ii) a review of the current gap to trigger levels and to combined buffer requirements, as well as (iii) other risk drivers for AT1 securities.

Download the complete report "Bank Capital Instruments"