$7 trillion rated debt due by end of 2012
New York, November 09, 2009 -- The maturities of banks' publicly traded debt (wholesale debt) have
shortened in recent years, according to a new report by Moody's
Investors Service that looks at the trend in more than 25 banking systems.
Those banks whose debt maturity profiles have shortened substantially
will face relatively large refinancing needs in the coming years,
exposing them to greater funding pressures and increased costs.
The average maturity of new debt issuances rated by Moody's has
fallen in several banking systems over the past five years. Globally,
average wholesale debt maturities issued by banks fell from 7.2
years to 4.7 years, which is the shortest average maturity
for new debt in 30 years. Moody's estimates that rated banks
will face maturing debt of about $10 trillion between now and the
end of 2015 -- $7 trillion of which will come due
by the end of 2012.
Having also examined individual banking systems, Moody's reports
that this trend has been particularly pronounced in the United States
and the United Kingdom. In the US, the average maturity of
rated debt has fallen from 7.8 to 3.2 years over the last
five years. In the UK, it has gone from 8.2 to 4.3
years. As a result, Moody's-rated banks in these
two systems will be challenged by more than $2 trillion of maturing
debt between now and the end of 2012.
"Throughout this crisis, the market has been focused on the
asset side of the balance sheet. This analysis focuses on the liabilities,"
said Moody's Vice President Jean-Francois Tremblay. Moody's
believes that banks whose debt maturity profiles is tilted towards the
short end will be driven by risk management to replace maturing short-term
debt with longer maturities.
"When a bank's debt profile becomes skewed towards short-term
maturities, it becomes vulnerable to a sudden increase in interest
rates and/or swings in investor confidence," he said.
Similarly, when a bank heavily relies on debt instruments that feature
periodic yield step-ups, call or put options, it also
increases its exposure to a refinancing risk, the report mentions.
"Such exposure may become increasingly apparent and important as
we begin to see the withdrawal of various government support programs
worldwide" Tremblay adds.
For example, a Baa-rated bank that issued short-term
debt under a Aaa-rated government guarantee program has been paying
a coupon of approximately 1.3%, whereas it would have
to pay approximately 7.75% currently for issuing a 10-year
bond on the basis of its own credit standing, a steep 645 basis
point increase.
Still, investors should not automatically associate the shortening
of a bank's debt maturity profile with credit quality concerns,
the rating agency said, as the ultimate impact is largely determined
by other factors. Moody's emphasizes that its ratings currently
incorporate refinancing risk as part of its ongoing credit analysis.
Banks' debt maturity profiles may become an important differentiating
factor of competitiveness and credit quality.
"Banks will attempt to reduce the size of their wholesale refinancing
needs by shrinking their balance sheet, increasing deposits base
or a combination of both", Tremblay said. Despite these
initiatives, Moody's expects that many banks will still be
left with a sizeable amount of debt to raise from the market.
Banks that ultimately have to issue debt at a higher cost may attempt
to pass on extra costs to customers. However, households
and corporates are already financially stretched and this move might cause
delinquencies to increase.
"Ultimately, we are focused on banks' ability to manage
this potentially significant increase in costs while generating sustainable
positive earnings," concludes Tremblay.
The report is titled "Banks' Wholesale Debt Maturity Profiles Shorten,
Exposing Many Banks to Refinancing Risks"
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New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
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New York
Jean-Francois Tremblay
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
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SUBSCRIBERS: 212-553-1653
Moody's: shorter bank debt maturities raise refinancing risk