S&P downgrades Euro banks

July 3, 2013: 1:10 AM ET
barclays
S&P has downgraded three European banks, citing risks posed by new regulation and economic uncertainty.
HONG KONG (CNNMoney)

Credit rating agency Standard & Poor's downgraded three European banks on Wednesday, citing worries over the size of their investment banking portfolios and the impact of new regulations.

The banks are Credit Suisse, Deutsche Bank and Barclays, all of which rely heavily on investment banking to drive revenue growth. All three firms had their ratings cut from A+ to A.

"We base today's rating actions on our opinion of the increasing risks that Europe's large banking groups active in investment banking face as regulators and uncertain market conditions continue to make operating in the industry more difficult," the bank said in a statement.

The outlook on all three banks is now stable, meaning further cuts to their credit ratings are unlikely in the near term.

The downgrades come amid a shifting regulatory landscape for banks, changes that are forcing some of the largest firms to make significant changes to their operations.

In addition, large banks are now working to raise funds required to meet new capital requirements, at a time when market volatility and a dour economic environment could impact earnings.

"We consider that these banks' debtholders face heightened credit risk owing to the industry's tighter regulation, fragile global markets, stagnant European economies, and rising litigation risk stemming from the financial crisis," S&P said.

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The primary theme running through S&P's analysis was that each bank faces significant levels of uncertainty.

Investment banking makes up 40% of revenues at Barclays (BCS), S&P said, a business facing risks that "are unlikely to abate in the near-to-medium term." Credit Suisse (CS) sources up to 50% of its revenue from investment banking.

Meanwhile, the rating agency said that Deutsche Bank's (DB) "ability to generate stable, predictable revenues" has decreased.

"Barclays, Credit Suisse, Deutsche Bank and UBS are among the most exposed in Europe to a combination of regulatory initiatives being undertaken globally on capital market-related businesses," S&P said.

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