crab bank rating methodology

8/3/2019 CRAB Bank Rating Methodology

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CREDIT RATING AGENCY OF BANGLADESH LIMITED


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Presentation Outline

Banks Risk A birds eye-viewBanks Risk A birds eye-view

Rating MethodologyRating Methodology

CRAB's Presentation 2


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Anatomy of Bank Risk

Non-Financial Risk

Financial Risk

Strategic R isk

Service Risk


Operational Risk Legal Risk Reputational Risk


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Balance Sheet Risk

Credit Risk

Market Risk

Intrinsic 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

CRABs BankDataBaseCRABs BankDataBase CRABs BankRatiosCRABs BankRatios

Rating ScaleRating Scale

Rating of Individual BankRating of Individual Bank

WeightWeight XX Analysis OutputAnalysis Output

WeightWeight XX Quantitative RatingQuantitative Rating


FINAL RATINGFINAL RATING


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CRABs Rating Methodology



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CRABs Rating Methodology



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Ana lys is Process o f Pro f i t ab i l i t y



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FACTOR : PROFITABILITY



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FACTOR : PROFITABILITY

0.80

0.70

Lgscore

Exponential

Power

Linear

Observed

ROAA

10.008.006.004.002.000.00

0.60

0.50

0.40

0.30

0.20

0.80

0.70

0.60

0.50

Lgscore

Exponential

Power

Linear

Observed


C_I

100.0080.0060.0040.0020.000.00

0.40

0.30

0.20


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Eff ic iency

Look in t o the cu r r en t yea r e f f i c iency l eve l

Last F ive Years Tren d

Trend Ana lysi s Re la t i ve to I ndus t r y and Peer

K ey I n d i ca to r

Cos t to I ncome Rat io : Non I n t e res t Expenses re la t i ve t o Re v en u e [ N et I n t e r est I n co m e + N o n I n t e r est I ncom e + Net Gain o r Losses on Secur i t ies Sa les]

Cost Per Bran ch

Cost Per Em lo ee


Th i s i s a m easu re o f bank s e f f i c iency and i t s ab i li t y to

g e n era te i n c rem e n ta l p ro f i t s w i t h a d d e d re v en u e

Ra t io i s j u dged in te rm s o f bus iness g row th ,

m a n a ge m e n t q u a l it y a n d o p e ra t i n g p e r f o rm a n ce


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Analy s is Pr ocess o f Ef f ic iency



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Analy s is Pr ocess o f Ef f ic iency



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FACTOR : EARNINGS AND VOLATILITY



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FACTOR : EARNINGS AND VOLATILITY



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FACTOR: Asset Qual i t y

Main Dr i ve r o f Fu t u re Ea rn ings

Non Per fo r m ing Loan Sta t us and T rend

Causes beh ind non pe r fo rm ing loan

Grad in g o f NPL i .e. Spec ia l Ment ion Accoun t ,Subs tanda rd , Doub t f u l and Bad Loss

Reschedu le Sta t us

W r i t e o f f Sta tu s

Fresh NPL Gener at ion


Gr oss NPL Rati o

Net NPL Rat io

NPL as % o f Shareho ld ers Equ i t y p lu s Loan Loss Reserv e


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NPL Tr en d o f PCBs



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NPL Tr en d o f PCBs



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Asset Qua l i t y



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NPL Tren d o f PCBs for FY 0 1- 06



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FACTOR : CAPITAL ADEQUACY

Cap i ta l Adequacy in te rm s o f regu la to r y requ i rem en ts

Exceed ing r egu la to ry cap i ta l and ex t en t

Tie r I Cap i ta l pos i t i on

K ey I n d i ca to r s

RWCAR

Tie r 1 Cap i ta l as % o f RWA

Shareho lde r s Equ i t y as % o f Depos i t and Bo r r ow ing



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FACTOR : LIQUIDITY & FUNDING

L iqu id i t y Managem en t

Liquidity risks as a function of the unique structure of a banksasset and liabilities

Degree to which illiquid assets (primarily loans) are funded bycore liabilities that are stable ( primarily customer deposits, longterm 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


Marke t R isk Appe t i t e

Sensitivity of both trading and non trading books to majorchanges in interest rates, equity prices, foreign exchange ratesand credit spreads.


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Fund ing St r uc tu r e

D ep o si t G ro w th i n t e rm s o f p ee r a n d i n d u s t r y

Fund ing Mix i .e . Cur ren t Depos i t , Sav ings Depos i t , TermD ep o si t , I n t e rb a n k b o r ro w i n g , Sh o r t Te rm Le n d i n g

Deposi t Renew Ra te

Movemen t o f Cos t o f Fund

Matu r i t y p ro f i l e o f Depos i t

Deposi t Len t Ou t Ra te



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RATI OS


Advance to Deposit Ratio


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FACTOR : FRANCHISE VALUE

W h y I t M at t e r s

Solidity of a banks market standing

Indicates the ability to generate and sustain earnings

Key Ana ly t ica l Area

ar e ar e an u s a n a y

Portfolio and Deposit base

Trend over the Period

Business Tenure

Earn i ngs Stab i l i t y


Degree of predictability of main business lines

Focus area: Retail / Corporate

Earn ings D ivers i f i ca t ion


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FACTOR : CORPORATE GOVERNANCE

Corpora te Governance

Relationship between the BoD, Management andShareholders

Degree of relationship to balance effectively shareholders

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

Cont ro ls and Risk Managem ent

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


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 Managem ent



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RISK POSITIONING

Financ ia l Repor t ing Transpar ency

Global Comparability of Reported Financial Information

Frequency and Timeliness of Reporting

Quality of Financial Information reported by banks

Large exposures to single obligor, industry or region

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

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


Industry Concentration: Aggregate exposures to a particularsector or industry relative to Tier 1 Capital

Regulatory Limit: Individual borrower limit as well as aggregatelarge loan exposure limit corresponding to its level of NPL relativeto its paid up capital


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RISK POSITIONING

L iqu id i t y Managem en t

Liquidity risks as a function of the unique structure of a banksasset and liabilities

Degree to which illiquid assets (primarily loans) are funded bycore liabilities that are stable ( primarily customer deposits, longterm 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


Marke t R isk Appe t i t e

Sensitivity of both trading and non trading books to majorchanges in interest rates, equity prices, foreign exchange ratesand credit spreads.


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FACTOR : ASSET QUALITY & PROVISIONING


crab bank rating methodology

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