CROSS-SECTORSECTOR COMMENT 31 May 2016ContactsBenjamin S. Garber 1.212.553.4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Market CommentSkimpy Profits and Tight Regulations Constrain Credit Quality US corporate and financial sectors face competitive and regulatory obstacles that prevent top performers from distinguishing themselves in terms of credit quality. Specifically, the differences in market-derived credit risk signals between large and small banks, REITs, and utilities are notably slim. In these sectors, expansion may necessitate heavy debt issuance while balance sheet composition is legally restrained. This contrasts with highly innovative industries that are able to produce windfall profits and expand without cranking up leverage.Credit risk signals converge when revenue is less concentrated Recently we wrote about US corporate sectors where there were large positive gaps in credit risk signals between the high and low revenue firms in a sector . Now we will examine the flip side of that scenariosectors with little to negative difference between the market-implied ratings of the highest revenue firms within a sector and all other firms.Of the 97 sectors we examined, 26 had a difference in the median EDF (Expected Default Frequency)-Implied Rating among the top four revenue firms and that of the other firms in the sector of one rating notch or less (Figure 1). For example, in the commercial banking sector, the top four revenue firmsled by JPMorgan Chase&Co.had a median EDF-implied rating of Baa1, just one notch above the median Baa2 rating of the other 314 firms in the sector.MOODY'S ANALYTICS CROSS-SECTOR2 31 May 2016 Market Comment: Skimpy Profits and Tight Regulations Constrain Credit QualityMOODY'S ANALYTICS CROSS-SECTOR3 31 May 2016 Market Comment: Skimpy ...
