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The Presentation
Banks Credit Rating
Name
Australia
Australian Rating
International
International
Europe
Europe
Fitch/IBCA
Japan
Japan
Taiwan
India
China
Russia
RUS Ratings
Banks Credit Rating
6.D+ - show the higher relative standing with its rating category.
7. D - is vulnerable to a greater degree than those banks
rated higher, to adverse circumstances in its
operating environment.
8.E+ - show the higher relative standing with its rating category.
9.E - is likely to be facing significant weaknesses in its
fundamental credit profile and may be in default
on some or all of its financial obligations.
Indirect Effects
Decline in value of bonds,
Adverse change in external
balance of payment (BOP),
Increase credit leverage,
Increase money-market
volatility.
INDUSTRY RISK
Very
High
High
Moderately
Moderately
High
Moderate
Low
Low
Australia
Moderately
Low
New Zealand
Singapore
Moderate
Hong
Kong
Malaysia
Moderately
High
South
Korea
Taiwan
Thailand
China
Philippines
High
Very High
L
o
w
Japan
India
Indonesia
Vietnam
Regulatory Grades
An approach using more rating grades should be preferred.
If a counterparty lies at the boundary of two rating grades,
the capital impact of a rating difference is reduced
significantly with more rating grades.
Credit Culture
A definition of acceptable credit risk that is known & applied
throughout the organization, such that the risks taken
reflect stated risk appetite.
Rating Models
The models should provide the basis of the internal rating
procedure to ensure consistency of approach to the setting
of ratings.
People
However, good the model sounds, it is very crucial that the
banks employ high-quality personnel to handle the models.
Credit Review
Analysis & audit of previous decisions on the credit
portfolio must be carried out.
Credit Forum
The setting of internal rating methodology for particular
portfolio segments is also vital, if the rating is to be effective.
Delegated Authorities
Management must ensure that the most appropriate level
of credit sign-off approves transactions, or facilities,
culminating in the credit committee.
Financial Risk
Funding & Liquidity
Capitalization
Earnings
Risk Management
Market Risk
Credit Risk
Financial Flexibility
Banks Credit Rating
Industry Risk
Structure
Depth of publicly traded capital markets and the trends in
this area,
Basic structure of the banking system,
(e.g. number & sizes of institutions)
Proportion of finance in the economy that is intermediated
through banks, non-bank competitors in the market & the
extent of that they pose a serious challenge to the banks,
Dynamics of inter and intra-industry competition,
(e.g. expectation of change, degree of dis-intermediation, & barriers
to entry).
Banks Credit Rating
Industry Risk
Structure
Strategic investments in industrial companies & types of
benefits/risks posed by holding these investments,
Is there any consolidation trend in the banking system?,
Degree of transparency, standards of accounting, reporting
systems, auditing standards applied, and
Reliability/strength of the countrys legal system & judiciary
procedures.
Industry Risk
Ownership Profile
Are the banks owned by corporate groups or individuals?
The advantages/disadvantages emerging from the
relationship.
Industry Risk
Customer Base
Existing commercial relationship prevailing between the
banks & corporate customers,
Financial strength of the personal sector & the level of social
benefits offered in the operating jurisdiction, and
Price sensitivity and the level of sophistication of the
customer base.
A very useful piece of information to assess the scope of banking
business flourishing, stagnating, or declining.
Industry Risk
Regulation
Is there any deposit insurance facilities for banks?,
Process of de-regulation, areas within the financial system
that have already been de-regulated,
Any additional measures expected, time frame for de-regulation process
& expected impact on various economic sectors?
Industry Risk
Market Position
Degree of vulnerability of the market position,
Banks market shares in key business sectors & size of
those markets,
Tangible advantages from the market position,
(e.g. funding sources, quality of business, pricing style)
What are the trends emerging from the existing market?
Industry Risk
Degree of Diversification
To what extent is the banks business represented by
diversification strategy?
What are the geographic spread of the banks customers
base?
Consideration of the banks segmental diversity,
(e.g. business units, customer segments, & products/services).
Are the banks internationally represented through
diversification?
(e.g. percentage of revenue local, international & both).
and practices).
The countrys political stability (e.g. has the country a stable govt?)
Structural problems facing the country (a number of underDeveloped countries face such problems namely in Africa and South
America).
Credit Risk
Structure of the balance sheet of the banks including the
relative proportion in different low-credit risk assets
(e.g. govt. bills. Inter-bank deposits) compared with higherrisk assets (e.g. loans, equities).
Credit portfolio split into : loan type, maturity, collateral,
customer base, economic sector, size, currency & country.
Level of fixed income securities (e.g. type, largest positions,
market value, & maturity structure).
Loan loss reserves, (e.g. type, general & specific, reserves against
on and off-balance sheet exposures, liquidation provisions, charge-off
for the past 5 years, and recoveries record).
Credit Risk
Concentration of credit risk (e.g. large exposures to specific
Industries, markets, individual borrowers, or specific loan types).
Trading Risk
Clear description of the organization structure.
Breakdown of products/services by currency, credit quality,
volume, and maturity profile.
Future product & market expansion plans.
Identification of the market strengths & weaknesses, and
level of interest in position taking.
Trading strategy on group basis & by individual products.
Review of historic trading records (e.g. products, market, size
of positions, volatility of net revenues, & profitability).
Profitability
Revenue/Average Assets
Net Interest Income/Average Assets
Non-interest Income/Average Assets
Non-interest expenses/Average Assets
Net operating Income before Loan Loss Provision/ Average Assets
Net operating income after Loan Loss Provision/Average Assets
Loan Loss Provision/Average Assets
Net Income/Average Assets (ROA)
Revenue/Average risk-adjusted Assets
Net Income/Average risk-adjusted Assets
Net Interest Income/Total Revenue
Non-interest Income/Total Revenue
Non-interest Expense/Total Revenue
Net Operating Income before Loan Loss Provision/Total Revenue
Net Operating Income after Loan Loss Provision/Total Revenue
Pre-tax Profit/Total Revenue
Net Income/Total Revenue
Net Interest Income/Average Earning Assets
Banks Credit Rating
Liquidity
Total Deposits/Total Liabilities
Loans/Customer (core) Deposits
Loans/Total Assets
Net inter-bank Deposits/Total Liabilities
Capital
Asset Quality
Loan Loss Provision/Average Loans
Net Charge-offs/Average Loans
Loan Loss Reserve/Gross Loans
Loan Loss Reserve/Risk Assets
Non-performing Assets (NPA)/Total Loans
Net NPA/Net Loans
Loan Loss Reserve/Non-performing Assets
Banks Credit Rating