South Sudan  | عربي


Subsequent to the last article on the sovereign credit rating process, an overview of the credit rating of financial institutions is outlined in this article.  The credit rating of financial institutions has witnessed increased attention recently due to the economic and financial crisis that impacted a large number of countries around the globe.  In this regard, it is important to note that despite the action taken by the rating agencies resulting in a downgrade in the credit rating of a large number of banks worldwide, all Qatari banks have maintained their credit rating during 2009.

A number of reasons prompt financial institutions to obtain a credit rating from the leading credit rating agencies.  This includes the ability to utilize the interbank deposits market in order to widen funding sources.  However, the ability to obtain these deposits depends on having a credit rating as required by the credit policies of banks that have surplus deposits seeking to deploy them in the interbank deposit market.  Furthermore, the ceiling of the level of these deposits depends on the credit rating of financial institutions whereby a higher ceiling is assigned to progressively higher credit ratings, and vice versa.  Therefore, financial institutions that lack a credit rating cannot utilize the interbank deposits market.

Another important reason that prompts financial institutions to obtain a credit rating is the ability to issue instruments in the capital markets (notes, bonds and sukuks), as investors’ who are considering buying these instruments require a credit rating as a prior condition to their participation.  Further, as in the case with the inverse relationship between the ceiling set on interbank deposits and credit ratings, the cost of issuing these instruments in terms of the interest rate paid or profit sharing rate, depends on the level of the credit ratings of the issuing institution whereby a lower rate is assigned given a higher credit rating and vice versa.

Credit rating can be defined as the ability and willingness to honor financial commitments (deposits) as they fall due.  Credit rating agencies which includes Standard & Poor’s (S&) , Moody’s, Fitch and Capital Intelligence (CI) assign a symbol for the rating of long-term deposits (more than one year) and a separate rating for the short-term (less than one year) deposits.

The highest possible long-term rating is AAA, which is used by S&P, Fitch and CI whereas Moody’s uses the symbol Aaa.  The next highest rating is Aa (Moody’s), corresponding to AA by S&P, Fitch and CI), followed by A and Baa (Moody’s) corresponding to BBB by the other rating agencies.  All of these ratings are considered investment grade ratings.  The sign (+) or (–) may be used to differentiate between a similar rating whereby A+ is higher than A; and as such, A is higher than A-.   Non-investment grade rating reflects a weak ability to meet financial commitments in a timely manner and start at BB+ and ends at C-, the weakest ability nearing default on payment.  In case of default, the symbol D is assigned.

Long-Term Ratings


 Symbols used by Standard & Poor’s,
 Fitch and Capital Intelligence

 What the symbol refers to

 Investment Grade  

 AAA

 Highest investment grade

 AA 

 A 

 BBB

 Lowest investment grade

 Below Investment Grade / Speculative Grade 

 BB

 Highest speculative grade

 B

 

 C

 Lowest investment grade

Short-term ratings are also indicative of the ability to meet financial obligations in a timely manner.  The highest short-term rating by Moody’s is P1, followed by P2 and P3.  On the other hand, NP which is an abbreviation of Non-Prime indicates a weak ability to meet financial commitments.  These short-term ratings are similar in concept to those used by Standard and Poor’s which are A1, A2 and A3 that corresponds to F1, F2 and F3 by Fitch.  The symbol used by Standard & Poor’s and Fitch to reflect a weak ability is B.

Short-Term Ratings


 Symbol used by rating agency  

 What the symbol refers to

 Moody’s

 Standard & Poor’s

 Fitch

 

 P1

 A1

 F1

 Highest investment grade

 P2

 A2

 F2

 

 P3

 A3

 F3

 Lowest investment grade

 NP

 B

 B

 Weak ability / non-investment grade

Another rating that is used is the Support Rating which indicates the likelihood of receiving financial support from the regulatory authorities should it be required, with the highest such rating being a level of 1, followed by 2 and 3 consecutively.

A Financial Strength Rating can also be used which is separate from the long and short term ratings.  Amongst factors considered in assigning this rating are issues related to the franchise value including financial results, market share, strategy and recent achievements and expansion plans.  Finally, a rating Outlook is assigned indicating the probability of a change in the long-term, short-term and Financial Strength ratings in the near future.  The Outlook can be Positive (indicating an upgrade), Stable (no change), or Negative (indicating a downgrade).

During the process of assigning a rating, a team from the rating agency meets the senior management team of the concerned financial institution.  Discussion centre on strategy, questions regarding the financial statement, business plans, and recent developments.  Subsequently a draft report is produced which is reviewed by management prior to the final release of the report that includes the assigned ratings.

QNB, Commercialbank and Doha Bank have a wide coverage from leading rating agencies including Moody’s, Standard & Poor’s, Fitch and Capital Intelligence.  The remaining Qatari banks have coverage mainly from Fitch and Capital intelligence as shown in the tables below.

Standard & Poor’s rating for Qatari Banks

Deposits

 

 Long Term

 Short Term

  Outlook

 QNB

 A+

 A1

 Stable

 Commercialbank

 A-

 A2

 Stable

 Doha Bank

 A-

 A3

 Stable


Moody’s rating for Qatari Banks

Deposits

 

 Long Term

 Short Term

 Strength

 Outlook

 QNB

 Aa3

 P1

 C-

 Stable

 Commercialbank

 A1

 P1

 C-

 Stable

 Doha Bank

 A2

 P1

 D+

 Stable

 Masraf Al Rayan

 A3

 P2

 D+

 Stable


Capital Intelligence rating for Qatari Banks


Foreign Currency

 

 Long Term

 Short Term

 Financial Strength

 Support

 QNB

 AA-

 A1+

 A+

 1

 Ahli Bank

 A-

 A2

 BBB

 2

 Commercialbank

 A

 A2

 A

 3

 Doha Bank

 A

 A2

 A

 3

 International Islamic

 BBB

 A2

 BBB

 3

 Qatar Islamic Bank

 A

 A2

 A

 2


Fitch rating for Qatari Banks

 

 Long Term

 Short Term

 Support

 Individual

 QNB

 A+

 F1

 1

 B/C

 Ahli Bank

 A-

 F2

 1

 C

 Commercialbank

 A

 F1

 1

 C

 Doha Bank

 A

 F1

 1

 C

 Qatar Islamic Bank

 A

 F1

 1

 C

 


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