Presented by : Dr.

Peter Larose
Banks Credit Rating
Sit Back,
Relax,
Enjoy,
The Presentation
1. What is credit rating?
2. Why the need for a credit rating?
3. Who are the credit rating agencies?
4. Factors influencing change in banks rating,
5. Rating definitions used by Standard & Poors (S&P),
6. S&P criteria for rating,
7. Where do the Taiwanese banks fit?
8. The role of rating agencies,
9. Use of external rating scales,
10.Internal ratings,
11.Banks rating methodology,
12.Financial ratios used by S&P,
13.Taiwan banking outlook, and
14.What have we learnt?
Focus of this Presentation
Banks Credit Rating
A credit rating is an evaluation report of how well or bad
a company is performing in absolute terms in a particular
market or industry.

Such a report makes it possible for the stakeholders to
compare a companys credit worthiness against other
companies operating in similar market or industry
internationally.

The rating exercise is considered as one of the most
essential reports, besides the External auditors report,
which provides the stakeholders an overview of the
financial standing of the commercial entity.

The report is made up of both; (a) quantitative, and (b)
qualitative information.
Banks Credit Rating
Why the Need for a Credit Rating?
(a) The financial sector especially the banking industry in
most emerging economies is going through a process
of change,

(b) Financial transactions have become a major economic
activity in most service-based economies, thus any
disruption or imbalance in its infrastructure will have a
significant impact on the whole economy,

(c) A safe and sound banking industry can bring about
stability within the financial markets,

(d) During the last decade, banks around the world had to
respond to the emerging challenges of competition,
risks and uncertainties,

Banks Credit Rating
Why the Need for a Credit Rating?
(e) It is considered part of the Corporate Governance
principles for a commercial entity to practice good
governance, especially banks,

(f) The stakeholders normally expects such a report as
part of their overall assessment of the companys or
banks financial soundness and stability,

(g) Analysts and investors can compare a company or banks
performance with another company or bank operating in
the same market or industry internationally, and

(h) Depending on the jurisdiction, the companies or banks
listed on the Stock Exchange must fulfilled such a
requirement as part of the regulatory and commercial
laws.

Banks Credit Rating
Who Are the Credit Rating Agencies?
There are at least 74 Credit Rating Agencies around the
world. Just to name a few:
Country Name
Australia Australian Rating
International Standard & Poors
International Moody's Investors Service
Europe Central European Rating Agency
Europe Fitch/IBCA
Japan Nippon Investors Service
Japan Japan Credit Rating Agency Ltd
Taiwan Taiwan Ratings Corporation
India Credit Rating Information Services of India
China Shanghai Far East Credit Rating Co Ltd.
Russia RUS Ratings
Banks Credit Rating
Factors Influencing Change in Banks Rating
Higher Rating

* Ability to generate sound, stable earnings and capital over
time (inclusive of both the regulatory and economic capital)

The prevailing political stability in the country, where the
banks are operating (upgrade of the BFSR by S&P focus on
preferential capital, and subordinated debts).

Application of conservative risk metrics (e.g. credit, interest
rate, foreign exchange rate), and

Consistent earnings a fundamental underpinning factor
for any rating exercise.

Banks Credit Rating
Factors Influencing Change in Banks Rating
Lower Rating

Major legislative changes that affect the banks in the
operating jurisdiction (e.g. new taxes on banks profits),

Significant decline in the banks profits (say 35%),

Material alteration to the Governance structure could
presage a downgrade,

Breach of securities covenants, and

Failure to comply with any regulatory capital requirement
based on the jurisdiction regulatory rules.



Banks Credit Rating
Ratings Definitions Used by Standard & Poors
The rating services use a 9-point rating scale based on the
following symbols:

1. A has a Very Strong fundamental strength compared
with that of its global peers.
NB: It is the highest BFSR assigned by Standard & Poors

2. B+ - show the higher relative standing with its rating category.

3. B - has a Strong fundamental strength.
It is more susceptible to the adverse effects of changes in circumstance
economic conditions than those entities rated as A

4. C+ - show the higher relative standing with its rating category.


BSFR means Bank Fundamental Strength Ratings by S&P
Banks Credit Rating
Ratings Definitions Used by Standard & Poors



5. C has adequate fundamental strength.
It is more sensitive to uncertainties and adverse circumstances
to a greater degree than higher-rated entities.

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.
It is the lowest BFSR assigned by Standard & Poors.
Banks Credit Rating
BSFR represent an S&P opinion of a banks
fundamental strength, or more specifically, what
has been formally referred to as status quo rating
on the bank.

Different rating agencies use different methodology.

BSFR assessment of what a single legal entity
within a group would be rated, which incorporate
the benefits or burden of being part of the group.

A BSFR would not include any potential capital
assistance from the group, regulator or Government
Banks Credit Rating
S&P does consider the following factors when
assessing a banks fundamental strength rating
(BSFR):
State of the economy,
Industry structure,
Regulatory environment,
Degree of competition,
Status of business,
Scope of geographic diversification & distribution,
Quality assets & investments,
Credit and market risk appetite,
Funding & liquidity position,
Capitalization, profitability & risk management structure,

These factors are embodied in a business & financial risk
model.


Banks Credit Rating
These risk factors include actions or inaction by the
Govt, conducted in its normal course of activity,
that may directly or indirectly affect banks.


Direct Effects
Change by the Government
Regulator changes:
tax regime,
lending requirements, &
other regulations.


Indirect Effects
Decline in value of bonds,
Adverse change in external
balance of payment (BOP),
Increase credit leverage,
Increase money-market
volatility.

Banks Credit Rating
A BSFR is a form of long-term issuer credit rating.

It must be noted that it is neither a counterparty credit rating
nor a substitute for one.

Normally, it complements a traditional counterparty credit
rating and it is intended to provide additional information
to all the stakeholders of banks.

A bank, which does not have a credit rating may be faced
with uncertainties for its future operations.

This is due that the business of banking is about information
which customers, investors, stock markets, lenders are
demanding all the time.

Banks Credit Rating
While, we discuss the credit rating for banks around the
World, irrespective of the jurisdiction, where they operate,
It is vital, that we ask
where do the Taiwanese banks fit with the Asia- Pacific
banking market?

The next slide addresses this question based a research
findings carried out by Standard & Poors.

The research takes into consideration the level of economic
risk vs the business risk.
Banks Credit Rating
Economic & Industry Risk in Asia-Pacific Banking Systems
ECONOMIC RISK

Very
High

High
Moderately
High

Moderate
Moderately
Low
L
o
w
Low
Australia
Moderately
Low
New Zealand
Singapore
Moderate
Hong
Kong
Malaysia
Moderately
High

Thailand
South
Korea
Taiwan

Japan
High
China
Philippines

India
Very High
Indonesia
Vietnam
I
N
D
U
S
T
R
Y

R
I
S
K

Source: Standard & Poors : Asia-Pacific Banking Outlook 2005
Banks Credit Rating
The role of the rating agencies within the reformed Capital
Accord is predetermined by their being the only globally
accepted benchmarks for the banking industry.

For this reason, the credit risk management functions of
many financial institutions & banks have been built on the
basis of methodologies comparable to the major external
agencies.

A key objective/function of the reform process is to build
on approaches already inherent and actively used by banks

As such the external rating methodologies must play an
Important role in any reform process.



Banks Credit Rating
The role of rating agencies is also important given the
standing of public ratings within financial markets.

Reliance on the rating agencies for providing background
analysis & ratings for external rated names also
compounds the level of penetration of rating agency
methodologies into banks rating processes.


Banks Credit Rating
The factors that allow banks to continue to promote the use
Of the rating agencies scales are as follows:

(1) Publicly Available Data Set
Moodys & Standard and Poors have made their internal
default and recovery information publicly available to any
interested party.

These data products are now widely used by the industry
to feed models used within the credit risk management
processes.

(2) Market Forces
The credit derivatives and asset securitization markets
have requirements for public ratings.
Banks Credit Rating
(3) Quantitative Ratings
Rating agencies have begun to develop more quantitative
ratings, which provide useful benchmarks for internal
rating models.
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.
Banks Credit Rating
Since many financial institutions define their internal rating
processes differently, it is useful that minimum standards
are established for the model approval of internal ratings.

In this respect, it is very important for Basel Accord to focus
on the development of a minimum standards on banks
overall internal rating processes, not just the rating models
used within these processes.

It is generally accepted by banking specialists that the
processes required to set globally consistent ratings will
depend on:

(a) Credit policy applied, (e) Risk Review,
(b) Credit culture, (f) Credit Forum, and
(c) Rating models, (g) Delegated Authorities.
(d) People,
Banks Credit Rating
Credit Policy Applied
This should outline how the internal rating process be
applied to various transactions and facilities.

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.
Banks Credit Rating
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.
Banks Credit Rating
The factors considered in the rating of banks or financial
Institutions are as follows:

Industry Risk Financial Risk
Structure Funding & Liquidity
Ownership profile Capitalization
Customer base Earnings
Regulation
Market position
Degree of diversification
Management style & strategies
Standards of accounting used

Perceived Economic Risk Risk Management
Credit Risk Strategy Market Risk
Market/Structural Risk Credit Risk
Trading 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.


Banks Credit Rating
Industry Risk
Ownership Profile
Are the banks owned by corporate groups or individuals?

The advantages/disadvantages emerging from the
relationship.

Level of government-owned banks within the banking system

The extent to which state-owned banks perform any special
public sector role or compete on equal footing with the
private sector banks (i.e. any special privileges?)

Extent which government involvement in the banking system
affects the sectors competitiveness.



Banks Credit Rating
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.


Banks Credit Rating
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?

What sort of legislations are observed by the banks?
(e.g. state, national, international standards)

Governments regulatory philosophy in relation to the need
of continuous intervention within the banking system & the
corporate sector,

Regulatory structure in place (e.g. level/quality of supervision etc)
Banks Credit Rating
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?
Banks Credit Rating
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).
Banks Credit Rating
Industry Risk (Management Style & Strategies)
Risk level of strategic direction,

Growth prospects,
(e.g. internal vs external growth, merger & acquisitions, financing policy
and practices).

Quality of forward planning (e.g. financial & strategic issues),

Credibility of management style (e.g. track record, past
Performance),

Corporate independence of the banks management
(e.g. political interferences, shareholders pressure on strategic decisions

Organizational structure (e.g centralized or decentralized)

Quality & depth of management (e.g. dependence on key personnel
Banks Credit Rating
Industry Risk (Accounting Standards Used)
Accounting for past due loans, restructured loans, other
problem loans, foreclosures, commitments, contingencies.

Valuation of other balance-sheet items, (e.g. real estates,
Foreclosed assets, derivatives, & other intangibles).

Revenue recognition policies, including interest accrual on
problem loans & scurrilities, fee income, income from the
securitization proceeds.

Expense recognition, impairment charges, pension expense
deferred taxes.

Use of expense reserves (including restructuring costs), their
materiality & movements.
Banks Credit Rating
Industry Risk (Accounting Standards Used)
Accounting principles used (e.g. IFRS or US GAAP)

Use of special purpose vehicles, joint ventures, non-financial
subsidiaries, other subsidiaries.

Securities valuation policies (e.g. book values vs market values).

Overall quality of accounting for earnings, considering the
Impact of special and non-recurring items, accounting
changes, & other smoothing techniques.

Adequacy of problem asset coverage, including provisioning
policy & valuations.

Off-balance sheet items (e.g. pension, retirement benefits,
contingent liabilities, guarantees, performance bonds)

Banks Credit Rating
Perceived Economic Risk
The countrys political stability (e.g. has the country a stable govt?)

Structural problems facing the country (a number of under-
Developed countries face such problems namely in Africa and South
America).

Structural problems can be categorized as:
* current account deficits,
* high inflation,
* high unemployment rate,
* lack of competitiveness, and
* fiscal deficits

From rating viewpoint these problems must be corrected
with measures so as to improve the countrys image in the
international community.

Banks Credit Rating
Perceived Economic Risk
The size of the economy is equally vital small island states
economies has great difficulties with the management of
the economy (i.e. strengths vs vulnerability).

This due to their size-effect, where it is difficult to achieve
economies of scale in mass production.

The small island states are very vulnerable to external
shocks due to its integration with the rest of the industrial
world.

The business cycle (e.g. volatility in GDP, volatility in asset prices,
bankruptcies, and other changes in the economy).

Constraints on the authorities to take appropriate economic
measures in good time.
Banks Credit Rating
Perceived Economic Risk
The growth prospects for the economy and the rate of credit
and monetary growth relative to the economic growth rate.

The openness of the economy with the rest of the world.
(e.g. regional, intra-regional, and international agreements).

Dynamics of savings and investment in the economy.
(e.g. policy on savings culture, and promotion of foreign direct
investments FDI).

Structure and overall financial strength of the corporate &
personal sectors.

Does the Government allow the private sector to play a key
role in the economy as engine of growth?
Banks Credit Rating
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 higher-
risk 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).

Banks Credit Rating
Credit Risk
Concentration of credit risk (e.g. large exposures to specific
Industries, markets, individual borrowers, or specific loan types).

Equity securities (e.g. economic sector, largest exposures,
Proportion of investment portfolio relating to previous underwriting
Positions, investment strategy, book value vs market value).

Reserves policy & adequacy.

Problem loans (e.g. Large credit exposures, levels in & changes in
Non-performing assets, past due loans, restructured loans, and
Expected future trends with other problem assets).

Banks Credit Rating
Market & Structural Risk
The role and objectives of the Ministry of Finance towards
risk appetite.

Reasons for structural risk (e.g. legal restrictions, regulatory
requirements, limitations on the local funding or hedging
markets, or position taking).

Use of non-cash market instruments (e.g. futures, forwards,
Swaps),

Levels of interest rate, foreign exchange, and equity
participation in the balance sheet.

Management attitude towards the Asset/Liability Management
(ALM) and the composition of the balance sheet.


Banks Credit Rating
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).

Liquidity of the market , which banks operate.
Banks Credit Rating
Financial Risk (Funding & Liquidity)
The banks philosophy towards the liquidity management,
and plan.

Flow of funds (e.g. deposit maturities, stability of funding, deposit
flows).

Composition of the banks funding (e.g. retail vs corporate,
professional markets).

Asset liquidity (e.g. pledged assets, long-term marketable securities,
ability to securitize the loan portfolio, standby facility with the Central
bank, inter-bank transactions).

Diversity of funding (e.g. deposits in geographic areas, size, access
to local capital and money market).
Banks Credit Rating
Financial Risk (Capitalization)
Banks capital position with respect to domestic capital &
BIS requirements.

Dividend pay out ratio internal growth rate of capital.

Ability to tap into external long-term capital.

Absolute size of the banks capital base & ability to absorb
extra-ordinary, unexpected losses.

Capital composition structure (e.g. risk capital, preferred shares,
perpetual debts, subordinated debts, minority interest, goodwill,
revalued assets, unrealized capital gains, loan losses in excess of the
target losses).

BIS risk-weighted assets adjusted for high credit risk.
Banks Credit Rating
Financial Risk (Earnings)
Operating expenses : level & trend of overhead relative to the
banks business mix and distribution network.

Quality of the accounting practices in place.

Net operating income analysis (level & trend).

Loan loss provision (e.g. current level, past volatility, & ability to
absorb future requirements).

Net interest income: margin trends & ability to maintain
volume.

Non-interest income: diversity & sustainability of other
income sources & growth potential.
Banks Credit Rating
Financial Risk (Earnings)
Impact of extra-ordinary gains, and/or, charges.

Tax position (e.g. historical and future use of net operating loss,
other tax planning scenarios).

Impact of inflation on earnings, return on equity vs the
reporting periods of inflation rate.

Earnings outlook or projections (e.g. budget vs actual, projection
for the medium to long-term).
Banks Credit Rating
Risk Management (Credit Risk)
Problem assets (e.g. responsibility to follow up, collections,
foreclosures, collaterals, style of credit management & monitoring).

Monitoring of credit exposures (e.g. control of disbursements,
review function, internal rating system, role of audit department, problem
of exposures).

Underwriting policies that is, the approval process for
Different types of products/ services, customer groups.
(e.g. fixed income securities, investment or trading equities, mortgage
loans, consumer loans, corporate loans, delegated lending powers,
collateral valuation, and monitoring).

Essentially, it is very important for management to have a
clear cut guideline or policy on the handling of credit risk
because it can have serious financial consequences for the
banks.
Banks Credit Rating
Risk Management (Market Risk)
A general understanding of market risk by the senior
mangers or executives and the importance of sound risk
management architecture.

Strategy regarding intentional position taking, limits,
authorities required for the breaching limits.

How traders and desk executives monitor positions & how
the system interacts with the overall risk management
structure in place.

Dynamics of the Asset & Liability Management Committee
(ALM) towards the different types of risk.

Hedging strategies (if any), and management view on
hedging transactions.
Banks Credit Rating
Risk Management (Market Risk)
Audit function (e.g. both internal & external auditors)

Accounting policies (i.e. consistency vs change)

Back office operations (e.g. valuation positions, organization,
disaster recovery procedures & policies).

Stress testing of the loan portfolio & other earning assets.

Impact of the information technology system on the entire
operations.
(e.g. adequacy of hardware & software, virus protection software,
safeguards against intrusion, theft, and damage, disaster recovery
plan, insurance protection).

These criteria are applied by Standard & Poors.
Banks Credit Rating
The ratios are categorized into FOUR types:

(a) Profitability,
(b) Liquidity,
(c) Capital,
(d) Asset Quality.

Whereas, banks are assessed using CAMEL system
for inter-bank comparison.

CAMEL represents Capital, Asset, Management,
Earnings, & Liquidity.
It is also the current practice to include sensitivity analysis

Banks Credit Rating
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

Banks Credit Rating
Capital

Adjusted Equity Capital/Total Assets
Adjusted Equity Capital/Total Risk Assets
Adjusted Equity Capital/Total Loans
Double Leverage
Equity Capital + Loan Loss Reserves/Total Loans
Tier 1 Capital/Regulatory Risk Assets
Adjusted Total Equity Capital/Total Assets
Adjusted Total Equity Capital/Regulatory Risk Assets
Dividend Pay Out Ratio

Banks Credit Rating
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
According to S&Ps evaluation, the Taiwanese banking sector remains
stable.

Systems financial strength is recovering following exceptional efforts
to clean up non-performing loans of the past years.

Banks have stabilized financial profiles in line with increasing
stability in the economy.

Industry risk remains moderately high as a result of structural
problems and the profitability of this extremely competitive industry
is rather weak.

Lending rates stays low leaving the industry with limited room to
deal with potential problem assets.
Banks Credit Rating
Conclusion made by S&P suggests that the banking sector needs to
further improve its risk management structure to cope with an
increasingly dynamic operating environment.
Quote: Asia-Pacific Banking Outlook 2005 S&P Report
Banks Credit Rating
Positive Factors Identified
1. Enhanced Transparency
Regulator is committed to enhance the systems transparency &
bring disclosure standards closer to international norms.
It is tightening up definitions of non-performing loans and plan
a much stricter loan provision requirements effective from July 05

2. Improvement in Asset Quality
Non-performing loans have been reduced from 15% in 2001 to 8%
as at June 2004.
It is expected that the banking sectors impaired asset ratio is likely
to drop within a range of 5% to 7% .

3. Regulatory-driven Takeovers & Consolidations
The first regulatory-driven takeover of a distressed bank through
Government auction system took place in 2004.
The regulator wants to use this strategy for other insolvent banks
in future.
Banks Credit Rating
Negative Factors Identified
1. Severe Competition
Taiwans banking system is high fragmented, while its product menu
are homogeneous.
There is intense competition for several key business products.

2. Overdependence on Interest Income
The banks rely too much on interest income, and non-interest revenue
is a small proportion of total revenue.

3. Government Privatization Initiative
More privatization of some govt-linked banks will not benefit from
the Government support which previously improved the ratings.


Banks Credit Rating
Negative Factors Identified
4. Inadequate Loan Loss Provisions
Average provision coverage ration increased to 23% (end of 2003) as
compared to 14% in 2001. (estimated loss account for 50%)

In spite of the banks developing their own provisioning practices, the
overall provisioning exercise is still considered inadequate.

5. Underdeveloped Risk Management Structure
Only a few banks have developed rather sophisticated risk
management structure.

The sectors overall risk management capacity is still in its infancy
stage.

Some banks remain over-reliant on the regulatory guidelines to
manage their risks profile.

Source: S&P Outlook 2005
Banking is a business about profit, risk, information, trust
and confidentiality. We as customers cannot audit banks,
but third parties like auditors and rating agencies can.

The more information we have about the operating result
of our own banks, the better for business decisions.

The decisions can involve:
(a) Safety of our deposits & savings,
(b) Quality of services received,
(c) Ability to borrow from safe banks,
(d) Prospect to enlarge our banker-customer relationship,
(e) Good return on our deposits & savings,
(f) Reliability on third party to audit the banks (e.g. rating
agencies, external auditors), and
(g) Assurance of information once a bank is rated.
Banks Credit Rating
I wish you all,
good luck
in your studies.
Banks Credit Rating