RY Under Review for Downgrade by Moody's

Moody’s Investors Service has announced:

a review of 17 banks and securities firms with global capital markets operations. Underpinning this review is Moody’s view that these firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.

The rationale behind the review is discussed below and in a report titled “Challenges for Firms with Global Capital Markets Operations: Moody’s Rating Reviews and Rationale,” published today. Today’s announcement also follows the publication on 19 January 2012 of a report titled “Why Global Bank Ratings Are Likely to Decline in 2012.”

LONG-TERM RATINGS AND STANDALONE CREDIT ASSESSMENTS– PLACED UNDER REVIEW

Royal Bank of Canada

During its review Moody’s will consider the structural vulnerabilities in the business models of global investment banks, which include the confidence-sensitivity of customers and funding counterparties, risk-management and governance challenges, as well as a high degree of interconnectedness and opacity. In addition, rapidly changing risk positions expose these firms to unexpected losses that can overwhelm the resources of even the largest, most diversified groups. Such challenges caused several issuers to fail, or to avoid failure only upon the receipt of external support, during the 2008 financial crisis.

Additional challenges have now emerged for banks with significant capital markets activities; these include more fragile funding conditions, higher credit spreads, increased regulatory burdens and very challenging macroeconomic and market environments. Some of these risks have been partly mitigated by changes to business models, and higher regulatory capital and liquidity requirements, but they have not been eliminated. Furthermore, these adverse trends have placed acute pressure on these firms’ profitability and increased the scope of restructuring required in their core businesses to generate the level of return on equities expected by shareholders.

The combination of changed operating conditions and increased regulatory requirements and restrictions has diminished these firms’ longer-term profitability and growth prospects. While we had initially expected their standalone credit profiles to recover once the acute phase of the crisis had passed, we now view these challenges as structural features of global investment banks. Our credit analysis is reflecting these challenges through greater emphasis on certain key rating factors in our methodologies, as discussed in more detail in the report “Challenges for Firms with Global Capital Markets Operations: Moody’s Rating Reviews and Rationale,” published today.

RY has a large number of preferred shares outstanding: RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G & RY.PR.H (DeemedRetractible) and RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.X & RY.PR.Y (FixedReset) and RY.PR.W (PerpetualPremium). All are tracked by HIMIPref™ and assigned to their respective indices.

Update: RY is irritated:

The announcement — which could result in a downgrade of as much as two notches for the Canadian bank — comes a little over a year after the bank was last cut by Moody’s.

“We are surprised to be included in this review; our inclusion is unwarranted,” RBC said in an emailed statement on Thursday. “This action does nothing to help investors differentiate between strong banks and weak ones. RBC’s credit rating and capital base are among the strongest of all banks globally.”

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