Moody's not so astonishing call: Every Spanish bank except Santander (SAN) is at least as risky as the Spanish government

06/25/2012 6:53 pm EST


Jim Jubak

Founder and Editor,

Some of this seems inevitable and reasonable: Today Moody's Investors Service downgraded the credit ratings on 28 Spanish banks. On June 13 the company cut its rating on the Spanish government to Baa3 from A3. In today’s downgrade Moody’s moved every Spanish bank except Banco Santander (SAN) to a rating lower than that of the Spanish government. Banco Santander’s rating was cut to Baa2 from A3, which leaves the bank one notch above the Baa3 rating on the Spanish government. (In Moody’s system Baa2 is one grade above Baa3. Baa3 is one notch above a speculative or junk rating of Ba1.)

Cutting the credit rating of most Spanish banks after cutting the rating of Spain itself makes sense to me because Spanish banks in aggregate have been the biggest buyers of Spanish government debt at recent auctions. The banks have used money from the European Central Bank’s three-year loan facility to buy government debt that according to European bank regulations counts as risk free capital. In keeping its rating for Banco Santander, a member of my Dividend Income portfolio, above the Baa3 rating for Spain, Moody’s cited Banco Santander’s manageable level of exposure to Spanish government debt relative to the bank’s Tier 1 capital and the geographical diversity of the bank’s balance sheet.

To put today’s Moody’s ratings in the context of last week’s credit downgrades on global investment banks, the new ratings put Banco Santander in the same Baa2 credit rating group as Citigroup (C) and Bank of America (BAC).  According to Moody’s, the government of Spain is now a riskier credit than those two U.S. banks.
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