Credit Suisse Irate at Moody's
The Swiss banking industry's historical tranquillity is going up in the smoke of a heated dispute between Credit Suisse and Moody's Investors Service.
The dispute began Oct. 22 when Moody's said it was reviewing the third-largest Swiss bank's sacrosanct triple-A debt rating for a possible down-grading.
The announcement not only enraged Credit Suisse, which ranked 39th in the world last year with $117 billion in assets, but also sparked an industrywide debate over the burgeoning power of the raters of bank debt, principally U.S.-based Moody's and Standard & Poor's Corp.
Effect on Stock Price
The Moody's announcement prompted a 7% decline during the succeeding week in the stock price of Credit Suisse's parent, CS Holding, to $1,280 a share. Friday, the shares closed in Europe at $1310.58, still off 6% since Oct. 22.
The affair seems likely to focus the growing resentment among some international bankers and corporate financial officers over the U.S. rating companies' clout. Their influence has grown to the point where, according to some critics, they rival the power of industry regulators but without the regulators' accountability.
Serge Ledermann, chief analyst at the Geneva banking firm of Lombard Odier & Co., said, "When you have the notoriety of Moody's, you can dictate the cost of capital that a bank pays."
Aware of such American clout, Germany's biggest bank, Deutsche Bank, has set plans in motion for a European-based ratings network. Its executives explicitly want to challenge the power and influence of Moody's and Standard & Poor's.
A Competitive System
Oliver Everling, a managing director at the Deutsche unit set up to form the prospective German and pan-European ratings systems, said that Moody's and S&P operate "a kind of monopoly" in Europe. "It's very important to have extra competition in the ratings field," he said.
A study for establishing the European network - involving links with national rating companies in Germany, France, Britain, and other countries - will be prepared by mid-1992, Mr. Everling said.
At the British rating firm IBCA Ltd., Robin Monro-Davies said issuers "are waking up to the fact that they are in the hands of a few rating agencies." Indeed, IBCA is positioning itself to confront what he called an "oligopoly" of U.S. agencies in the worldwide business.
Greg Root, president of Thomson BankWatch in New York, an affiliate of the American Banker, said a ratings monopoly is "dangerous, and most of the banks we deal with agree with that."
Other Raters Aloof
Others raters, apparently sensing a standoff in the Credit Suisse affair, have been quick to distance themselves from the potential Moody's downgrading. S&P indicated it had no plan to review its AAA rating of the bank.
IBCA similarly is maintaining its rating, at a time when Credit Suisse's "credit has strengthened," said Mr. Monro-Davies, the firm's managing director.
While many banks worldwide have had their ratings cut in the last two years, the Big Three Aaa-rated banks in Switzerland - Credit Suisse, Union Bank of Switzerland, and Swiss Bank Corp. - have generally remained unassailable.
But last month, in what industry analysts said was an unusually brief statement, Moody's said Credit Suisse was under examination, "given the increasingly competitive banking environment in Switzerland and abroad," as well as the impact of recession on its asset quality.
Ignoring Other Swiss Biggies
"We are puzzled why Moody's has singled out Credit Suisse because increased competition would affect all three of the major Swiss banks," said Christopher Davies, director of research at Barclays de Zoete Wedd in London.
Hans Geiger, a Credit Suisse board member, said the Moody's announcement dealt with the problems of Swiss banking and the economy but "nothing specific to our bank."
Adding to the controversy, parent CS Holding came out shortly after the Moody's move with a 1991 forecast for earnings that would be the best in the group's recent history.
CS Holding said earnings would exceed those in its best year, 1989. That would come on top of a 77% gain in banking cash flows in the first half of this year, compared with flows in the 1990 period.
Upbeat Forecast Discounted
Mr. Geiger said Moody's had scheduled its review despite prior notification of the upbeat forecast, disclosed in the normal confidential dialogue between rating agency and client.
Moody's vice president John Kriz said that Credit Suisse's strong financial performance "was not news to us" but pressures on the Swiss banking industry had spurred the review.
"Looking at the entire range of factors, we felt a review of Credit Suisse was appropriate at this time but not for the other big Swiss banks," he said.
Credit Suisse will now campaign for Moody's to reverse itself. When Moody's signals a possible downgrading, however, it imposes one 90% of the time, said industry observers.
Mr. Kriz said the chance is closer to 50% "of a rating action in the near future."
Mr. Geiger said he's "confident we can maintain our rating," though the bank is ready if necessary to "discontinue the relationship" with Moody's.
James R. Kraus contributed to this report.