Standard & Poor's Ratings Services requests comments from investors, issuers, and other market participants on the proposed introduction of Bank Fundamental Strength Ratings (BFSRs) on rated banks and financial institutions headquartered in Asia-Pacific (including Japan, Australia, and New Zealand).
Under the proposal, Standard & Poor's will indicate its opinion of a bank's fundamental strength through a nine-point rating scale. This scale, which is separate from Standard & Poor's traditional ratings scale, will use the symbols 'A', 'B+', 'B', 'C+', 'C', 'D+', 'D', 'E+', and 'E'. These symbols were selected based on market familiarity with them. Standard & Poor's would also like to receive comments from investors, issuers, and other market participants on whether a prefix (such as 'bkB+' or 'fiB+') or suffix (such as 'B+bk' or 'B+fi') should be attached to such symbols.
BFSRs are intended to provide traditional rating users with supplemental information about Standard & Poor's opinion on a bank's credit profile in a scenario where extraordinary assistance or interference from the bank's owners, regulator, or government is excluded.
A significant portion of market participants, whose activities cover transactions with banks in the emerging markets, more particularly in Asia, had previously indicated to Standard & Poor's their interest in the introduction of such a rating scale.
Examples of how BFSRs may benefit rating users include:
There are many government-linked banks in Asia, and governments in Asia often take a proactive role in supporting the solvency and or liquidity of major banks in their countries. The Counterparty Credit Ratings on such banks incorporate the likely support of the government. However, investors may wish to examine the scenario where the government's involvement or ownership in a bank is wound down. Investors may also prefer to assess the credit quality of banks based solely on their own merits. Thus, a BFSR helps investors to understand the bank's relative credit profile in the absence of government support.
There may be instances where sovereign credit risk in Asia constrains the Counterparty Credit Ratings of some banks and, indeed, compresses the ratings of the strongest and weakest banks into a very narrow band. BFSRs would indicate to rating users the relative credit profiles of these banks after discounting sovereign risk. Investors are thus able to better distinguish among different banks, many of which may have the same Counterparty Credit Rating as the rating on the sovereign.
Comments on the proposed introduction, including the proposed criteria discussed below, should be sent to criteriacomments@standardandpoors.com by June 15, 2005.
Bank Fundamental Strength Ratings Initiative
Standard & Poor's proposes to assign, by the end of July 2005, BFSRs on all banks in Asia-Pacific for which Standard & Poor's maintains Counterparty Credit Ratings, except for the following:
Subsidiaries of foreign banks, where the subsidiary
-- Is a small player in its domestic market. In the event the bank subsidiary represents 5% or less of the domestic banking market as measured by total assets. Standard & Poor's does not perceive that there is a sufficient level of meaningful interest from financial market participants to initiate a BFSR on such subsidiaries.
-- Has a parent bank domiciled outside Asia-Pacific and on which Standard & Poor's has not assigned a BFSR. Because of the high level of interaction between a parent bank and its subsidiary, it would be difficult to opine on the fundamental strength of the subsidiary without a corresponding opinion on its parent bank.
Start-up banks. For the purposes of this initiative, "start-ups" are defined as those banks with five years or less of operations but does not include banks formed as a result of mergers. Standard & Poor's does not perceive that there is a sufficient level of meaningful interest from financial market participants to initiate a BFSR on such banks.
Banks with assigned public information credit ratings. Public information credit ratings, designated with a 'pi' subscript, are not included for the purposes of this initiative.
BFSRs will be initiated by Standard & Poor's. BFSRs may be based solely on publicly available information and may be determined with or without the participation of the bank or financial institution's management.
Proposed Bank Fundamental Strength Ratings Criteria
A BFSR represents Standard & Poor's opinion of a bank's fundamental strength or, more specifically, what has been informally called Standard & Poor's "status quo" rating on the bank. Standard & Poor's may also assign BFSRs on nonbank financial institutions.
A BFSR is Standard & Poor's assessment of what a single legal entity within a group would be rated incorporating the benefits or burdens of being part of the group, including such things as access to group distributions, involvement of group management, access to group resources (excluding capital contributions), and the benefit or detriment of the group's financial flexibility. A BFSR would not include any potential capital contribution from the group, regulator or government.
In determining a BFSR, Standard & Poor's assumes no extraordinary assistance from external parties, such as the bank or financial institution's owners or government institutions, and, conversely, no interference from government or regulatory action that may disrupt the ability of the bank or financial institution to service and pay out on its domestic and foreign currency liabilities. Interference from government or regulator includes any action taken by the government or regulator on banks in an emergency, such as a compulsory freeze on deposits and imposition of exchange controls.
The exclusion of such external factors implies that BFSRs do not indicate the overall likelihood of timely payment by the bank or financial institution. Rather, BFSRs indicate the likely prospect of a bank requiring external assistance if it faces financial distress.
In determining a BFSR, Standard & Poor's considers business and financial risk factors affecting the rated entity from the economy, industry, and regulatory environment in which the entity operates, and the entity's competitive position, business and geographic diversification and distribution, quality of assets and investments, credit and market risk appetite, funding and liquidity position, capitalization, profitability, and risk management systems. These risk factors include actions or inaction by the government, conducted in its normal course of activity, which may directly and indirectly affect banks. Examples of direct effects include changes by the government or regulator on the tax regime, lending requirements or other regulations. Examples of indirect effects are the repercussions caused by financial stress faced by a government such as a decline in the value of government bonds, adverse change in a country's external balance of payments, increasing credit leverage by domestic corporates and households, and increased money market volatility.
A BFSR is a form of long-term issuer credit rating. It is neither a Counterparty Credit Rating nor a substitute for one. A BFSR complements a traditional Counterparty Credit Rating and is intended to provide additional information regarding Standard & Poor's opinion on a bank or financial institution.
Proposed Bank Fundamental Strength Ratings Definitions
A
A bank or financial institution, in the absence of extraordinary assistance or interference from its corporate group, regulator or government, assigned a Bank Fundamental Strength Rating (BFSR) of 'A' has very strong fundamental strength compared with that of its global peers. 'A' is the highest BFSR assigned by Standard & Poor's.
B
A bank or financial institution, in the absence of extraordinary assistance or interference from its corporate group, regulator or government, assigned a BFSR of 'B' has strong fundamental strength. The bank or financial institution is, however, more susceptible to the adverse effects of changes in circumstances and economic conditions than those entities rated 'A'.
C
A bank or financial institution, in the absence of extraordinary assistance or interference from its corporate group, regulator or government, assigned a BFSR of 'C' has adequate fundamental strength. However, the bank or financial institution is more sensitive to uncertainties and adverse circumstances to a greater degree than higher-rated entities.
D
A bank or financial institution, in the absence of extraordinary assistance or interference from its corporate group, regulator or government, assigned a BFSR of 'D' is vulnerable to a greater degree, than financial institutions rated higher, to adverse circumstances in its operating environment.
E
A bank or financial institution, in the absence of extraordinary assistance or interference from its corporate group, regulator or government, assigned a BFSR of 'E' is likely to be facing significant weaknesses in its fundamental credit profile and may be in default on some or all of its obligations. The bank or financial institution's continued operation may be at the forbearance of the industry regulator, and external assistance may be necessary. 'E' is the lowest BFSR assigned by Standard & Poor's.
N.R.
An issuer designated N.R. is not rated.
Plus (+): The ratings from 'B' to 'E' may be modified by the addition of a plus sign to show the higher relative standing within the rating categories.
Rating Outlook Definitions
A Standard & Poor's rating outlook assesses the potential direction of the BFSR over the intermediate term (typically six months to two years). In determining a rating outlook, consideration is given to any changes in the economic and/or fundamental business conditions. An outlook is not necessarily a precursor of a rating change or future CreditWatch action.
Positive means that ratings may be raised.
Negative means ratings may be lowered.
Stable means that ratings are not likely to change.
Developing means ratings may be raised or lowered.
CreditWatch
CreditWatch highlights the potential direction of a rating on the Standard & Poor's BFSRs scale. It focuses on identifiable events and short-term trends that cause ratings to be placed under special surveillance by Standard & Poor's analytical staff. These may include mergers, recapitalizations, voter referendums, regulatory action, or anticipated operating developments. Ratings appear on CreditWatch when such an event or a deviation from an expected trend occurs and additional information is necessary to evaluate the current rating. A listing, however, does not mean a rating change is inevitable. CreditWatch is not intended to include all ratings under review, and rating changes may occur without the ratings having first appeared on CreditWatch. The "positive" designation means that a rating may be raised; "negative" means a rating may be lowered; and "developing" means that a rating may be raised, lowered, or affirmed.
Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Standard & Poor's (Australia) Pty. Ltd. does not hold an Australian financial services license under the Corporations Act 2001. Any rating and the information contained in any research report published by Standard & Poor's is of a general nature. It has been prepared without taking into account any recipient's particular financial needs, circumstances, and objectives. Therefore, a recipient should assess the appropriateness of such information to it before making an investment decision based on this information.
