Allfirst credit rating reduced

Move by S&P could mean higher borrowing costs

`It doesn't exactly surprise us'

Similar action is taken against parent company

April 16, 2002|By William Patalon III | William Patalon III,SUN STAFF

Allfirst Financial Inc., which lost $690 million in a currency trading scandal, had a key credit rating reduced yesterday by Standard & Poor's Inc., a move that could increase borrowing costs for the Baltimore-based bank.

S&P took similar action on Allfirst's parent company, Allied Irish Banks PLC of Dublin, Ireland, though it removed both banks from its "watch" list, and said their credit-rating outlooks are "stable."

"It is definitely disappointing," said Maurice Crowley, Allfirst Financial's chief financial officer. "But it doesn't exactly surprise us."

The S&P downgrades have no impact on the safety of depositors' money at Allfirst, bank officials emphasized.

The credit-rating reductions are the first since the bank's disclosure more than two months ago that currency trader John M. Rusnak had covered up huge currency losses over a five-year period.

S&P had placed AIB and Allfirst on its CreditWatch list Feb. 6, the day the losses were revealed publicly.

Rival rating agency Moody's Investors Service affirmed Allfirst's good credit rating, though it reduced its financial strength rating, a measure of the institution's ability to run without the backing of its parent company.

In announcing the rate reductions, S&P said AIB's internal investigation into the trading losses "provided overwhelming evidence of the weaknesses in [the] control environment at Allfirst's treasury unit, and the failures in broader oversight in detecting frauds perpetrated over five years, which Standard & Poor's believes has had negative implications for AIB's reputation and franchise."

S&P lowered the so-called counterparty credit ratings of the two banks. That rating essentially gauges the risk that either AIB or Allfirst would fail to repay certain types of loans. Despite the downgrades, AIB and Allfirst still have strong credit ratings.

AIB saw its long-term counterparty credit rating drop from "A plus" to "A," while its short-term rating was affirmed at "A-1."

Allfirst had both its long- and short-term ratings reduced by S&P. Its long-term rating was cut from "A" to "A minus," while its short-term rating was cut from "A-1" to "A-2."

The downgrades could increase the interest rates Allfirst pays within the "wholesale" borrowing market - for instance, money borrowed overnight by Allfirst from a Federal Reserve-member bank, Crowley said.

Fortunately, Crowley said, Allfirst hasn't had to test those waters, because it hasn't engaged in any overnight borrowing since the scandal broke. Because officials with Allfirst and AIB didn't know what kind of fallout to expect once the losses were revealed, the parent company provided the subsidiary with $600 million in cash almost immediately after the Feb. 6 announcement.

Now that it's clear Allfirst doesn't need the money, it will soon begin transferring the cash back to AIB, Crowley said. That means Allfirst will soon be testing the wholesale borrowing market, to see what kind of an increase in borrowing costs - if any - the downgrade by S&P will bring about, Crowley said.

If costs do increase, Allfirst won't pass them along to customers through higher loan rates, increased fees or lower interest rates on bank accounts, Crowley said. Instead, Allfirst will attempt to make up the difference by finding new business. That task should be much easier with the bank out from under the cloud of a credit-rating review, he said.

"That the outlook is stable should reassure [customers]," he said.

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