02/16/2012 03:52 EST | Updated 04/17/2012 05:12 EDT

Moody's may lower ratings of some of the world's largest banks including RBC

The Royal Bank (TSX:RY) says it does not deserve to be among a group of the world's largest banks whose credit ratings are being placed under review by ratings agency Moody's Investors Service.

Canada's largest bank said Thursday it was surprised to be included in the review, launched because of Moody's concerns about the banks' long-term prospects for profitability and growth.

"This action does nothing to help investors differentiate between strong banks and weak ones. RBC's credit rating and capital base are among the strongest of all banks globally," the bank said in a statement.

"Over the past three fiscal years our capital markets business has been consistently profitable and represents less than 25 per cent of RBC's earnings," it added.

Besides the Royal Bank, other banks in line for possible downgrades include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

The credit ratings agnecy, which also extended ongoing reviews for downgrades on 11 companies, said the review could result in a downgrade of the Royal Bank by up to two notches, but cautioned a final determination had not been made.

"The combination of changed operating conditions and increased regulatory requirements and restrictions has diminished these firms' longer-term profitability and growth prospects," Moody's said.

"While we had initially expected their stand-alone credit profiles to recover once the acute phase of the crisis had passed, we now view these challenges as structural features of global investment banks."

The review follows a move by Moody's to downgrade Royal Bank to Aa1 from Aaa in December 2010 due to the bank's capital markets exposure.

DBRS rates Royal Bank an AA, while S&P rates the bank AA-.

BMO Capital Markets analyst George Lazarevski suggested the current review by Moody's will likely result in a downgrade of one notch.

"We view this rating action as neutral to slightly negative for credit spreads, given that Moody's already rates Royal Bank two notches above S&P and one notch above DBRS," he wrote in a note to clients.

Lazarevski noted that Royal Bank has a strong diversified model and ranks first or second in all of its major business segments.

Royal Bank earned a record $6.7 billion from its continuing operations last year, while total net income dropped to $4.85 billion from $5.22 billion in 2010 due to a writedown related to the sale of its U.S. retail banking operations. Revenue grew to $27.43 billion from $26.08 billion.

It is the country's largest bank by assets and market capitalization, and has 77,000 employees serving more than 18 million clients. The bank has operations across North America and 52 other countries.

Shares in the company were down 17 cents at $53.29 in afternoon trading on the Toronto Stock Exchange on Thursday.

Moody's said late Wednesday that nine of the 17 banks and securities firms under review are headquartered in Europe.

The debt rating agency is concerned that banks with significant capital market arms are dealing with challenges such as widening credit spreads, delicate funding conditions and increased regulatory requirements and restrictions.

Some of the risks facing banks have been mitigated by increased regulatory capital and liquidity requirements, but they have not gone away completely, the ratings agency said.

The Moody's review will concentrate on the parent companies and major operating companies of the 17 banks and securities firms. The agency said it will address subsidiaries that might be impacted by the potential weakening of their parent company's credit profile separately.

The agency said it is extending its reviews on whether to lower ratings on Credit Suisse, Macquarie, Nomura, UBS, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC, Royal Bank of Scotland and Societe Generale.

The announcement by Moody's came just days after the ratings agency said that it was cutting the ratings of Italy, Portugal and Spain because of uncertainty over the eurozone's ability to enact reforms necessary to dig out of its debt crisis and Europe's weakening economy.

— With files from The Associated Press