bank rating methodology.ppt - credit rating agency of...

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BANK RATING METHODOLOGYBANK RATING METHODOLOGY

CREDIT RATING AGENCY OF BANGLADESH LIMITED

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Presentation Outline

Bank’s Risk – A bird’s eye-viewBank’s Risk – A bird’s eye-view

Rating MethodologyRating Methodology

CRAB's Presentation 2

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Anatomy of Bank Risk

Non-Financial Risk

Business Risk

Financial Risk

Balance Sheet RiskBusiness Risk

Strategic Risk

Balance Sheet Risk

Service Risk


Operational Risk Legal Risk Reputational Risk

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Balance Sheet Risk

Credit Risk

Concentration Risk

Market Risk

Interest Rate RiskConcentration Risk

Intrinsic Risk

Interest Rate Risk

Liquidity Risk

Currency Risk


Commodity Risk

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RATING PROCESS FLOW

Rating Frame Work

Analysis and Evaluation

Rating Committee Meeting


Final Rating

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Rating Framework

CRAB’s “BankDataBase”CRAB’s “BankDataBase” CRAB’s “BankRatios”CRAB’s “BankRatios”

Rating ScaleRating Scale

Rating of Individual BankRating of Individual Bank

WeightWeight XX Analysis OutputAnalysis Output

WeightWeight XX Qualitative RatingQualitative Rating

WeightWeight XX Quantitative RatingQuantitative Rating


WeightWeight XX Qualitative RatingQualitative Rating

FINAL RATINGFINAL RATING

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CRAB’s Rating Methodology


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CRAB’s Rating Methodology


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Analysis Process of Profitability


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FACTOR : PROFITABILITY


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FACTOR : PROFITABILITY

0.80

0.70

Lgscore

ExponentialPowerLinearObserved

ROAA10.008.006.004.002.000.00

0.60

0.50

0.40

0.30

0.20

0.80

0.70

0.60

0.50

Lgscore

ExponentialPowerLinearObserved

CRAB's Presentation 15C_I

100.0080.0060.0040.0020.000.00

0.40

0.30

0.20

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Efficiency

L k i t th t ffi i l l• Look into the current year efficiency level

• Last Five Years Trend

• Trend Analysis Relative to Industry and Peer

Key Indicator

• Cost to Income Ratio : Non Interest Expenses relative to Revenue [ Net Interest Income + Non Interest Income + Net Gain or Losses on Securities Sales]

•Cost Per Branch

•Cost Per Employee


Cost Per Employee

This is a measure of bank’s efficiency and its ability to generate incremental profits with added revenue

Ratio is judged in terms of business growth, management quality and operating performance

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Analysis Process of Efficiency


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Analysis Process of Efficiency


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FACTOR : EARNINGS AND VOLATILITY


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FACTOR : EARNINGS AND VOLATILITY


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FACTOR: Asset Quality

M i D i f F E i• Main Driver of Future Earnings

• Non Performing Loan Status and Trend

• Causes behind non performing loan

• Grading of NPL i.e. Special Mention Account, Substandard, Doubtful and Bad Loss,

• Reschedule Status

• Write off Status

• Fresh NPL Generation

Key Indicators


Key Indicators

• Gross NPL Ratio

• Net NPL Ratio

• NPL as % of Shareholders Equity plus Loan Loss Reserve

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NPL Trend of PCB’s


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NPL Trend of PCB’s


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Asset Quality


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NPL Trend of PCB’s for FY 01-06


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FACTOR : CAPITAL ADEQUACY

C it l Ad i t f l t i t• Capital Adequacy in terms of regulatory requirements

• Exceeding regulatory capital and extent

• Tier I Capital position

Key Indicators

• RWCAR

• Tier 1 Capital as % of RWA

• Shareholder’s Equity as % of Deposit and Borrowing


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FACTOR : LIQUIDITY & FUNDING

Li idit M t• Liquidity Management

• Liquidity risks as a function of the unique structure of a bank’s asset and liabilities

• Degree to which illiquid assets (primarily loans) are funded by core liabilities that are stable ( primarily customer deposits, long term debts and equity)

• Asset Liability matching in light of interest rate dynamics

• Liquidity monitoring and control system

• Diversification of its funding

• Contingent planning and liquidity stress testing


• Market Risk Appetite

• Sensitivity of both trading and non trading books to major changes in interest rates, equity prices, foreign exchange rates and credit spreads.

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Funding Structure

D it G th i t f d i d t• Deposit Growth in terms of peer and industry

• Funding Mix i.e. Current Deposit, Savings Deposit, Term Deposit, Interbank borrowing, Short Term Lending

• Deposit Renew Rate

• Movement of Cost of Fund

• Maturity profile of Deposit

• Deposit Lent Out Rate


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RATIOS


• Advance to Deposit Ratio

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FACTOR : FRANCHISE VALUE

Wh It M ttWhy It Matters

• Solidity of a bank’s market standing

• Indicates the ability to generate and sustain earnings

Key Analytical Area

Market Share and Sustainability• Market Share and Sustainability

• Portfolio and Deposit base

• Trend over the Period

• Business Tenure

• Earnings Stability


• Degree of predictability of main business lines

• Focus area: Retail / Corporate

• Earnings Diversification

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FACTOR : CORPORATE GOVERNANCE

Key Analytical AreaKey Analytical Area

• Corporate Governance

• Relationship between the BoD, Management and Shareholders

• Degree of relationship to balance effectively shareholders and creditors interestand creditors interest

•Board Effectiveness

• Board Independence

• Ownership and Organizational Complexity

• Management Compensation


• Key Personnel Risk

• Insider and Related Party Risk

•Integrity of Accounting and Audit

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FACTOR : CONTROLS AND RISK MANAGEMENT

C t l d Ri k M t• Controls and Risk Management

• Internal Checks and Balance System

• Functionality of System in light of business mix

• Technological advancement

• Past Control issues and qualified Audit Reports

• Risk Management

• Risk Governance

• Risk Management

• Risk Measurement

• Risk Infrastructure and Intelligence


• Risk Infrastructure and Intelligence

Checks and balances between senior executives and Board,

Between risks and business line units,

Limit system, Regular use of stress tests, and Independence of CFO,CRO

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Risk Management


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RISK POSITIONING

Fi i l R ti T• Financial Reporting Transparency

• Global Comparability of Reported Financial Information

• Frequency and Timeliness of Reporting

• Quality of Financial Information reported by banks

• Credit Risk ConcentrationCredit Risk Concentration

• Large exposures to single obligor, industry or region

• Good diversification across economic sectors enables the bank to ride through business cycles without undue harm to asset quality

• Borrower Concentration: Large exposures relative to Tier 1 Capital and Pre-tax pre Provision Income


• Industry Concentration: Aggregate exposures to a particular sector or industry relative to Tier 1 Capital

• Regulatory Limit: Individual borrower limit as well as aggregate large loan exposure limit corresponding to its level of NPL relative to its paid up capital

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RISK POSITIONING

Li idit M t• Liquidity Management

• Liquidity risks as a function of the unique structure of a bank’s asset and liabilities

• Degree to which illiquid assets (primarily loans) are funded by core liabilities that are stable ( primarily customer deposits, long term debts and equity)

• Asset Liability matching in light of interest rate dynamics

• Liquidity monitoring and control system

• Diversification of its funding

• Contingent planning and liquidity stress testing


• Market Risk Appetite

• Sensitivity of both trading and non trading books to major changes in interest rates, equity prices, foreign exchange rates and credit spreads.

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FACTOR : ASSET QUALITY & PROVISIONING


bank rating methodology.ppt - credit rating agency of...

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