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Rating Commercial Banks

Presented by: Wasi mullah


In te rnat ion al I slami c Uni ver si ty
Islamaba d

Credit Risk Management Course—Faysal Bank Limited


What is Credit Rating?

Credit Rating is an objective,


professional, and independent opinion
regarding the credit quality of a debt
instrument and ability of an Entity to
meet its un-secured obligations.
Rol e & Use of Credi t Rati ngs

To enhance transparency and


efficiency in debt capital markets
by reducing the information
asymmetry between borrowers &
lenders
Rol e & Use of Credi t Rat ings… ….

Credit Ratings are not:

A tool for performance assessment


A recommendation to buy or sell
An output of quantitative models

“They are a measure of Probability of


default or expected loss.”
Rol e & Use of Credi t Rat ings… ….

Independent and professional ratings, by


providing a risk profile of the company, help the
CFOs to negotiate a better rate for their debts.
•Once a company obtains a rating, its
management is obliged to make continuous
efforts to improve the rating. These efforts
translate into overall improvement in
performance.
Rol e & Use of Credi t Rat ings… ….

Sometimes a creditor could demand and get a


bank guarantee at a cost to the entity.
However, a sufficiently high credit rating may
obviate the need for guarantee, thus, saving
the cost of guarantee, which is likely to be
higher than the cost of rating.
Credi t Rati ng Scal es
Credit Rating Scales are prospective
Driven by future performance criteria
but actually assessing repayment
capacity
AAA ratings are assigned usually to
entities enjoying strong government
support
Ratings of BBB & above are of
investment grade
Ratings are expected to be more stable
in the upper rating bonds
Rating Scale – Long Term
Rating Scales

JCR

BB
BB-
B+
B

CCC

CC

CC

D
Rating Factors
M I R A C L E S

M
Management
•Credibility & Quality of
Management, Team Vision
•Spread of Technical and
Management Skills
•Stability of Management &
I Succession Plan
Information Technology
•Board Quality and Relevance of
•Internal Systems
Experience
•External Systems
•Proactive & Reactive Strategy
Rating Factors
M I R A C L E S

R Reputation
• Bank’s Franchise
• Sponsors’ Franchise

A Asset
• Quality of funded and non-funded credits.
• Diversification by client, group, sector,
branch, region, etc
• Collateral quality, reinvestment rate risk,
risk based systems, underwriting quality
• Credit evaluation
• Asset Concentration
Rating Factors
M I R A C L E S

C Capital
• Capital Structure
• Level & Quality of Capital
• Hidden reserves
• Ability to arrange Additional Capital
• Growth in Capital, capital adequacy
under Basel II
• Earning Retention.
Rating Factors

M I R A C L E S

L Liquidity
• Mix of Funding Sources
• Liquid Assets, Interbank Ratio
• Matching of Funds
• Distressed Borrowing
Rating Factors

M I R A C L E S
E
Earnings
• Level of Recurring Earnings - PPP
• Quality of Earnings - Trend, Stability & Mix
• Projections and future provision
requirements
• Efficiency / Overheads
• Return Indicators
Rating Factors
M I R A C L E S

Supervisory
• Internal Controls (Operational &
Other Risks)
• Risk Management
Other Factors
• Size,
Group/Sponsor
Support
• Regulatory
Environment
• History
Thank you for your time

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