Presented by : Dr. Peter LarosePresented by : Dr. Peter Larose

Banks Credit Rating

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Relax,

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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 & Poor’s (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, and14.What have we learnt?

Focus of this Presentation

Banks Credit Rating

A credit rating is an evaluation report of how well or bada company is performing in absolute terms in a particularmarket or industry.

Such a report makes it possible for the stakeholders tocompare a company’s credit worthiness against other companies operating in similar market or industryinternationally.

The rating exercise is considered as one of the mostessential 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 company’s or bank’s financial soundness and stability,

(g) Analysts and investors can compare a company or bank’s 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 theworld. Just to name a few:

Country NameAustralia Australian Rating

International Standard & Poor’s

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 & Poor’s

The rating services use a 9-point rating scale based on thefollowing 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 & Poor’s

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 & Poor’s

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 & Poor’s.

Banks Credit Rating

BSFR represent an S&P opinion of a bank’sfundamental strength, or more specifically, whathas been formally referred to as “status quo” ratingon the bank.

Different rating agencies use different methodology.

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

A BSFR would not include any potential capitalassistance from the group, regulator or Government

Banks Credit Rating

S&P does consider the following factors whenassessing a bank’s 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 riskmodel.

Banks Credit Rating

These risk factors include actions or inaction by theGovt, 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 EffectsDecline 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 ratingnor a substitute for one.

Normally, it complements a traditional counterparty creditrating and it is intended to provide additional informationto all the stakeholders of banks.

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

This is due that the business of banking is about informationwhich 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- Pacificbanking market?”

The next slide addresses this question based a researchfindings carried out by Standard & Poor’s.

The research takes into consideration the level of economicrisk vs the business risk.

Banks Credit Rating

Economic & Industry Risk in Asia-Pacific Banking Systems

ECONOMIC RISK

Very High High

ModeratelyHigh Moderate

Moderately Low

Low

Low Australia

Moderately Low

New ZealandSingapore

Moderate Hong Kong

Malaysia

Moderately High Thailand

South Korea

TaiwanJapan

High ChinaPhilippines India

Very High IndonesiaVietnam

IND

US

TR

Y R

ISK

Source: Standard & Poor’s : Asia-Pacific Banking Outlook 2005

Banks Credit Rating

The role of the rating agencies within the reformed CapitalAccord is predetermined by their being the only globallyaccepted benchmarks for the banking industry.

For this reason, the credit risk management functions ofmany financial institutions & banks have been built on thebasis of methodologies comparable to the major externalagencies.

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

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

Banks Credit Rating

The role of rating agencies is also important given thestanding 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 agencymethodologies into banks’ rating processes.

Banks Credit Rating

The factors that allow banks to continue to promote the useOf the rating agencies scales are as follows:

(1) Publicly Available Data SetMoody’s & Standard and Poor’s have made their internaldefault and recovery information publicly available to anyinterested party.

These data products are now widely used by the industryto feed models used within the credit risk managementprocesses.

(2) Market ForcesThe credit derivatives and asset securitization markets have requirements for public ratings.

Banks Credit Rating

(3) Quantitative RatingsRating agencies have begun to develop more quantitativeratings, which provide useful benchmarks for internalrating models.

Regulatory GradesAn 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 reducedsignificantly with more rating grades.

Banks Credit Rating

Since many financial institutions define their internal ratingprocesses differently, it is useful that minimum standardsare established for the “model” approval of internal ratings.

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

It is generally accepted by banking specialists that theprocesses required to set globally consistent ratings willdepend 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 AppliedThis should outline how the internal rating process beapplied to various transactions and facilities.

Credit CultureA definition of acceptable credit risk that is known & appliedthroughout the organization, such that the risks taken reflect stated risk appetite.

Rating ModelsThe models should provide the basis of the internal ratingprocedure to ensure consistency of approach to the settingof ratings.

PeopleHowever, good the model sounds, it is very crucial that thebanks employ high-quality personnel to handle the models.

Banks Credit Rating

Credit ReviewAnalysis & audit of previous decisions on the credit portfolio must be carried out.

Credit ForumThe setting of internal rating methodology for particularportfolio segments is also vital, if the rating is to be effective.

Delegated AuthoritiesManagement must ensure that the most appropriate levelof credit sign-off approves transactions, or facilities,culminating in the credit committee.

Banks Credit Rating

The factors considered in the rating of banks or financialInstitutions 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 ManagementCredit Risk Strategy Market RiskMarket/Structural Risk Credit RiskTrading Risk Financial Flexibility

Banks Credit Rating

Industry RiskStructureDepth of publicly traded capital markets and the trends inthis area,

Basic structure of the banking system, (e.g. number & sizes of institutions)

Proportion of finance in the economy that is intermediatedthrough banks, non-bank competitors in the market & theextent 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 RiskStructureStrategic investments in industrial companies & types ofbenefits/risks posed by holding these investments,

Is there any consolidation trend in the banking system?,

Degree of transparency, standards of accounting, reportingsystems, auditing standards applied, and

Reliability/strength of the country’s legal system & judiciaryprocedures.

Banks Credit Rating

Industry RiskOwnership ProfileAre 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 specialpublic sector role or compete on equal footing with theprivate sector banks (i.e. any special privileges?)

Extent which government involvement in the banking systemaffects the sector’s competitiveness.

Banks Credit Rating

Industry RiskCustomer BaseExisting commercial relationship prevailing between the banks & corporate customers,

Financial strength of the personal sector & the level of socialbenefits 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 bankingbusiness flourishing, stagnating, or declining.

Banks Credit Rating

Industry RiskRegulationIs there any deposit insurance facilities for banks?,

Process of de-regulation, areas within the financial systemthat 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)

Government’s regulatory philosophy in relation to the needof continuous intervention within the banking system & thecorporate sector,

Regulatory structure in place (e.g. level/quality of supervision etc)

Banks Credit Rating

Industry RiskMarket PositionDegree of vulnerability of the market position,

Banks’ market shares in key business sectors & size ofthose 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 RiskDegree of DiversificationTo what extent is the banks’ business represented bydiversification strategy?

What are the geographic spread of the bank’s customersbase?

Consideration of the banks’ segmental diversity,(e.g. business units, customer segments, & products/services).

Are the banks’ internationally represented throughdiversification?(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, otherproblem 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 onproblem loans & scurrilities, fee income, income from thesecuritization proceeds.

Expense recognition, impairment charges, pension expensedeferred taxes.

Use of expense reserves (including restructuring costs), theirmateriality & 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-financialsubsidiaries, other subsidiaries.

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

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

Adequacy of problem asset coverage, including provisioningpolicy & valuations.

Off-balance sheet items (e.g. pension, retirement benefits,

contingent liabilities, guarantees, performance bonds)

Banks Credit Rating

Perceived Economic Risk The country’s 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 SouthAmerica).

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 country’s image in theinternational community.

Banks Credit Rating

Perceived Economic Risk The size of the economy is equally vital – small island stateseconomies has great difficulties with the management ofthe 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 industrialworld.

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 economicmeasures in good time.

Banks Credit Rating

Perceived Economic Risk The growth prospects for the economy and the rate of creditand 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 keyrole in the economy – as engine of growth?

Banks Credit Rating

Credit Risk Structure of the balance sheet of the banks including therelative 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 againston and off-balance sheet exposures, liquidation provisions, charge-offfor 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 underwritingPositions, investment strategy, book value vs market value).

Reserves policy & adequacy.

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

Banks Credit Rating

Market & Structural RiskThe role and objectives of the Ministry of Finance towardsrisk appetite.

Reasons for structural risk (e.g. legal restrictions, regulatoryrequirements, 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 equityparticipation in the balance sheet.

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

Banks Credit Rating

Trading RiskClear 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, andlevel of interest in position taking.

Trading strategy on group basis & by individual products.

Review of historic trading records (e.g. products, market, sizeof 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, depositflows).

Composition of the bank’s 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 Centralbank, inter-bank transactions).

Diversity of funding (e.g. deposits in geographic areas, size, accessto 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 absorbextra-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 thetarget losses).

BIS risk-weighted assets adjusted for high credit risk.

Banks Credit Rating

Financial Risk (Earnings)Operating expenses : level & trend of overhead relative to thebanks’ 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 toabsorb future requirements).

Net interest income: margin trends & ability to maintainvolume.

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 thereporting period’s of inflation rate.

Earnings outlook or projections (e.g. budget vs actual, projectionfor 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, problemof 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, mortgageloans, consumer loans, corporate loans, delegated lending powers,collateral valuation, and monitoring).

Essentially, it is very important for management to have aclear cut guideline or policy on the handling of credit riskbecause it can have serious financial consequences for thebanks.

Banks Credit Rating

Risk Management (Market Risk)A general understanding of market risk by the seniormangers 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 & howthe system interacts with the overall risk managementstructure in place.

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

Hedging strategies (if any), and management view onhedging 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 entireoperations.(e.g. adequacy of hardware & software, virus protection software,safeguards against intrusion, theft, and damage, disaster recoveryplan, insurance protection).

These criteria are applied by Standard & Poor’s.

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 systemfor 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&P’s evaluation, the Taiwanese banking sector remains stable.

System’s 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 tofurther improve its risk management structure to cope with anincreasingly 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 system’s 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 sector’s 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 Taiwan’s 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 sector’s 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, trustand confidentiality. We as customers cannot audit banks, but third parties like auditors and rating agencies can.

The more information we have about the operating resultof 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