There was a huge amount of uncertainty and a wide range of scenarios to be analysed but, unlike the great financial crisis, the Covid-19 pandemic was not a bank-led crisis. The progress that banks had made in raising capital and strengthening balance sheets meant that the risks to creditors were relatively well contained, says Ana Arsov in New York who co-heads global bank ratings with Nick Hill in Paris and Stephen Long in Hong Kong.
“It was clearly a massive and unprecedented event but that said, we were very conscious that banks were going into this shock with strong credit metrics,” says Arsov. “That’s one reason why, although we were pretty quick to flag for downside risk by changing our various banking system outlooks to negative back in March and April last year, we were measured in our approach and it was a relatively small proportion of our global bank ratings that we ended up downgrading.”
By the first anniversary of the pandemic, Moody’s had put many of the banking systems it covers back to a stable outlook. “That reflects the relative resilience of most banks globally, and, and in turn the relatively high degree of support that governments provided for global economies,” says Hill.
Moody’s is a great believer in what Arsov describes as its “no surprises” approach.
“Investors appreciate transparency,” she explains. “We never want the investment community to be asking, ‘where did this rating action come from and what is Moody’s thinking?’ Our goal is to give investors and issuers, as well as the broader marketplace, clarity regarding our ratings and credit views affecting the sector.”
Instead, Moody’s prides itself on the transparency of its methodologies and its communications around potential ratings impact. “The way we go about communicating changes, making sure we get the timing right, and arranging events like webinars is a big part of our thinking,” says Hill.
The digital leap taken as almost all market participants began working from home last year led, perhaps surprisingly, to more engagement with Moody’s rather than less. Hill says that its webinars and roundtables were better attended than ever before. “These types of events are a great feedback loop for us in terms of understanding what investors are thinking about,” he adds.
Moody’s has also made efforts over the last few years to react speedily to the news cycle. “We want to be out there with our view as soon as possible,” says Arsov. “We aim to be very nimble and responsive to shifts in the market environments and clearly we had a big test of that last year, but investors also expect us to have clear views on longer term trends.”
Among the big themes for Moody’s are the questions of what climate change means for financial institutions, the impact of a changing interest rate environment and the digitalisation of the financial sector. “These are all longer term themes, which happened to be accelerated by the pandemic, but investors expect us to be able to talk to those just as much as expected credit losses due to the pandemic,” says Hill.
The agency’s framework for analysing the effects of climate change on banks highlights its approach to thematic issues.
The framework looks at the impact of rising portfolio credit risk for banks as climate change impacts borrowers and asset values in the real economy, at the way it accelerates business model transformation in response to operational and strategic dilemmas, at the pressure banks are under to reallocate lending and investment, and the impact of climate regulation on banks’ activities.
“We consider how ESG touches on every aspect of a bank’s operations, and we will use that framework in all our research going forward,” says Arsov. “Even when we write about a narrowly-focused subject, we keep in mind these big, global and macro themes.”
Supporting all this work takes a strong bench of analysts with whom issuers and investors, who value stability, can build up trust over the years. Arsov says that talent management is a big focus for the leadership team as it looks ahead. “We are very conscious about developing and hiring talent to ensure we have the diversity, knowledge and technical skills for the future.”