Perspective on Bank Downgrades

Last week, rating agencies downgraded US Bank and HSBC, arguably two of the strongest banks in the US and Europe.  Moody’s downgrades highlight the challenges that all banks currently face, and we feel that the downgrades actually highlight why each company’s bonds are worth owning.  In downgrading US Bank to A1 from Aa3, Moody’s cited the challenges of a protracted low interest rate environment, increased regulation and lending competition, as well as exposure to mortgage banking.   Moody’s then highlighted the fact that US Bank continues to be one of the highest rated banks in the US and globally, due to its diverse business, operational efficiency and above average and stable earnings.  Fitch, on Friday, downgraded HSBC to AA-, due to its expansion into mainland China and the costs of managing a global franchise.  Fitch then went on to highlight HSBC’s strong capitalization and liquidity, as well as its strong earnings growth. SNW constantly evaluates the credit risk of our clients’ bond holdings, relative to the yield and total return potential of the securities.  We continue to believe that both HSBC and US Bank, as well as the other bank bond holdings in our clients’ accounts, offer attractive total return profiles.  This cannot be said of all banks, however, as many struggle to compete in this challenging economic environment.