|
|
| |
|
FINANCIAL INSTITUTIONS
(for details)
RAM Ratings’ approach to the rating of financial institutions or “FIs” (i.e. commercial banks, merchant banks, finance companies and development banks) involves the analysis of both quantitative and qualitative factors. These factors are analysed to determine the level of risk in an FI’s ability to meet its financial obligations in a timely manner.
The first step in the rating process is the assessment of the FI’s operating environment, which focuses on the well-being of the economy and the regulatory framework before conducting any FI-specific analysis. FI-specific analysis centres on the FI itself, rather than the group. This is premised on the fact that different banking groups may have different set-ups and business activities that will complicate any comparison. RAM Ratings, however, will conduct a cursory examination of the subsidiaries as well as the consolidated statements of the banking group, to assess possible drains on the resources of the FI.
RAM Ratings only conducts solicited ratings, which will require the full co-operation of the FI in providing detailed information on its operations. The analysis will involve charting financial data and compiling a set of financial ratios to detect the trends and anomalies in the FI’s market and financial positions. While quantitative analysis is an important consideration when determining the strength of an FI’s credit standing, qualitative factors - which zoom in on issues beyond numbers and ratios - play a critical role in assessing the creditworthiness of an FI. Factors examined include the FI’s market position and financial flexibility.
Evaluation of an FI’s credit strength also takes into consideration the operating environment in which it conducts its business activities. An understanding of this environment involves analysis of the economic scenario, Government policies, the Central Bank’s guidelines and the level of competition among the various types of FIs.
Industry Characteristics and Trends
Analysis of the current economic scenario and expected future economic developments is important as the banking sector’s performance hinges on the well-being of the country’s economy, given its exposure to the various economic sectors. The rating exercise will look into several indicators like the growth trend in Gross Domestic Product (“GDP”) as well as the historical and expected performance of the various economic sectors.
Another important area of contemplation is the level of competition among the various types of FIs moving forward, taking into consideration any impending liberalisation or threat from global players.
Regulatory Environment
Understanding Government policies and their effect on the banking sector’s regulatory structure are crucial in analysing the performance of FIs. We view effective regulatory supervision as essential towards ensuring the integrity of information received. This is deemed important, as we are unable to undertake a detailed review of an FI’s operations.
Integrity aside, Assessment of the FI’s regulatory environment will focus on the Central Bank’s guidelines on banking operations which include prudent controls on liquidity, portfolio requirements, capital adequacy requirements, provisions for bad and doubtful debts, and classification of non-performing loans.
Market Position
There are different types of institutions within the market; to identify the potential problems each kind may face provides a better understanding of an FI’s strength and/or weakness. Our evaluation will consider the degree of rivalry within the banking industry and the challenges posed by non-bank institutions as well as the presence of international foreign banks. Analysis of market position takes the following factors into account:
Asset size and market share by product type (i.e share of the banking system’s retail deposit structure)
 |
Diversity of business operations and network |
|
Level of information technology (“IT”) and its integration |
|
Niche market |
|
Franchise value |
Financial Flexibility
Assessment of financial flexibility identifies the financing options available to an FI under stress. Factors considered in such analysis include the following:
|
Affiliations to other organisations and shareholders (i.e. ownership quality and likelihood of support from shareholders) |
|
Ability to access various financial markets within a difficult environment (depends on the FI’s credit strength and inter-bank relationships) |
|
Ability of internal reserves to cover losses |
|
Ability to liquidate investments to obtain funding |
Shareholders’ support in the form of adequate financial resources and willingness to provide backing in difficult times are important considerations. Nevertheless, strong shareholders’ support alone cannot over-shadow the fundamentals of an FI although the level of enhancement may vary. This is also true for Government- or state-owned FIs. The issue of shareholders’ support deals with the provision of short-term funds, such as temporary loans or the injection of more permanent capital. An indication of the parent’s willingness and likelihood of support stems from its track record in terms of answering cash calls. Another avenue of flexibility is the ability of a financially beleaguered FI to tap the capital market for funds. This would also depend on the FI’s credit strength and its relationships with its peers.
FI-SPECIFIC ANALYSIS
In rating an FI, the foremost consideration is to assess the likelihood that it may face difficulties in repaying its financial obligations in a timely manner. During the course of the rating procedure, attention is focused on the financial strength and payment capacity of the FI based on its historical trends, typically going back 5 years, and compared against its peers. The analysis, however, will not be complete without an evaluation of the expected performance of the FI in the future. Therefore, the rating will also cover the FI’s projected business and financial profiles over the next 2 - 3 years.
FI-specific analysis seeks to determine the institution’s business and financial fundamentals. The appraisal focuses on the modified elements of the classic CAMEL model where:
|
C stands for Capital Adequacy |
|
A stands for Asset Quality |
|
M stands for Management Quality |
|
E stands for Earnings Quality |
|
L stands for Liquidity and Funding |
The CAMEL model incorporates analysis of both quantitative and qualitative values, with quantitative meaning financial ratios while qualitative refers to the subjective elements driving the FI’s operations. Being inter-related, the elements in the CAMEL model cannot be applied singularly. Any movement or decision on one element will definitely affect the others. In light of this, a very clear and in-depth understanding of their inter-relationship is crucial in analysing an FI. Meanwhile, a highly rated FI need not necessarily have the best attributes in each of the CAMEL elements. By the same token, having the best accomplishments in terms of the quantitative elements of the CAMEL model also does not automatically guarantee an FI the highest rating.
|
| |
|
|
|
| |
CORPORATE PROFILE RATING
(for details)
In response to the need for the evaluation of a company under Basel II, RAM Ratings provides a Corporate Profile Rating (“CPR”) or issuer rating. This represents RAM Ratings current opinion on the overall capacity of the entity to meet its financial obligations on a timely basis, i.e. fundamental creditworthiness. In other words, this is an indicator of default risk. The opinion is not specific to any particular financial obligation, as it does not take into account the distinct nature or provisions of a particular commitment.
A high CPR Rating by RAM Ratings--an ECAI--, will help the corporate obtain better credit terms with banks as it affords the lending institution the opportunity to reduce capital allocation. Hence, these institutions can optimise their cost of capital by balancing their credit profile by offering lower rates to well rated corporates and higher rates to unrated or lower rated corporate borrowers.
Because it provides an overall assessment of a company’s credit strength, the CPR can also be used for a variety of commercial and financial purposes, such as negotiating long-term leases or in the general assessment of counterparty credit in transactions. A CPR Rating will also help importers and exporters gain credibility with their overseas buyer/suppliers. Companies may also use the CPR to obtain an independent external review of management, its strategies and performance. CPR will enable a corporate to join the elite league of transparent, well governed corporates.
RAM Ratings looks at the following aspects when carrying out a CPR.
Industry Risk
- industry profile and growth prospects
- industry’s cyclicality
- sensitivity of demand to economic situations, government policies
- volatility of supplies and prices of raw materials/end-products
- vulnerability to technological changes, obsolescence risk, product fashion or trend, and changes in consumer preferences
- Barriers to Entry/Exit
- Threats of Substitutes
- Level of Competition
Business and Operating Risk
- business model, business strategies
- competitive strength relative to its peers.
- Basis of Competition
- Market Position and Size
- Product/Service Diversity
- Customer Analysis
- Plant Facilities and Location
- Availability of Raw Materials
- Efficiency of Assets
- Cost Structure
- Labour Relations
- Credit Controls
- Inventory Management
Financial Risk
- Profitability
- Funding Structure and Liquidity
- Leverage and Coverage
- Cash Flow Stability and Adequacy
- Financial Flexibility
Management
- Corporate Goals and Strategies
- Risk Tolerance
- Funding Policies
- Succession Planning
- Competence and Integrity
Other
- Parent - Subsidiary Relationship
- Credit Enhancements
 |
| |
|
| |
CORPORATE DEBTS
Corporate debt ratings, reflect the creditworthiness of the debt instruments issued by domestic corporations. The ratings reflect the relative risk of each corporation's issue with regard to full and timely payment of interest and principal. The measure of relative risk between different instruments is based on an alphanumerical rating scale. The ratings assist investors in their investment decisions. Annual reviews and updates of published ratings keep investors apprised of any possible changes in the credit risk of an instrument.
All issues are rated based on a structured framework focusing on various business and financial risk areas, with slight variations to cater to the individual peculiarities of the respective industries.
|
| |
|
| |
|
| |
General Rating Approach For ASSET-BACKED SECURITIES
(for details)
RAM Ratings' rating approach for asset-backed securities ("ABS") covers 4 main aspects, namely: (1)asset risk; (2) payment structure; (3) legal and tax issues; and (4) servicer and trustee review. Although details of the analytical process may vary according to the class of asset securitised, this generic approach to the rating of ABS can be applied to most assets such as consumer loans, credit card receivables, collateralised debt obligations ("CDO") and commercial mortgage-backed obligations.
Asset Risk
RAM Ratings' ABS rating approach starts with an in-depth analysis of the credit risk of the underlying assets. The main purpose of this part of the analysis is to evaluate the potential impairment of cash flow resulting from the delinquency or default on the securitised assets.
Asset risk assessment can take different forms, depending on the nature of the underlying assets. For example, risk factors considered in analysing the cash flow from a commercial property such as a shopping mall would typically include the mall's location, tenants' profiles, sustainability of rental income, market position and operating expenses. Meanwhile, risk factors considered in the analysis of trade receivables would include industry and obligor concentration, account seasoning and historical dilution, as well as delinquency and loss experience. The objective of this analysis is to answer the questions of "How risky are the securitised assets?" or "What can affect the securitised assets and cash flow generated by the assets?" and the resultant impact on the cash flow of the ABS issuer. This part of the analysis is also data-intensive, as the historical performance of the underlying collateral assets has to be compiled and analysed. RAM Ratings would require vintage static pool performance data on the underlying assets covering at least 1 complete economic cycle.
Payment Structure
RAM Ratings analyses the payment structure of the transaction and assesses the adequacy and timing of the cash flow to meet the promised payments on the ABS, based on the stated priority under the ABS structure. The aim is to identify where a potential mismatch in cash flow can arise and how this risk can be addressed or mitigated. The cash flow in an ABS transaction can be influenced by many factors such as payment priority, interest rate, pre-payment, reinvestment rate and liquidity. In the cash flow analysis, the adequacy and form of credit enhancement are also evaluated via stress-testing the asset's cash flow. The level of stress applied should commensurate with the rating assigned. Generally, higher stress tests are applied for higher-rated debt securities.
As part of the rating process, RAM Ratings also evaluates the structural features incorporated into the transaction and how these mechanisms can mitigate the risks involved. Examples of structural features are trigger events as well as interest rate and currency exchange risk hedging arrangements. The credit risks of all counterparties who provide credit support to the transaction are also considered in the rating process.
Legal and Tax Issues
The legal and tax reviews involve the analyses of the legal and tax structures governing the ABS transaction. Typically, the legal issues that need to be addressed in an ABS transaction include the mode of transfer of the assets to the special-purpose vehicle ("SPV"), enforceability, true sale, perfection of security interest and the bankruptcy remoteness of the SPV. RAM Ratings requires expert opinions that address the legal and tax issues in respect of the transaction. The legal review would also cover a review of the transaction documents such as the trust deed, sale and purchase agreement, servicing agreement, swap agreement, guarantee investment contract, credit support agreement and liquidity support agreement. In all instances, the issuance of the final rating is subject to RAM Ratings' satisfactory review of all the transaction documents as well legal and tax opinions.
Servicer and Trustee Review
As part of the rating consideration, RAM Ratings assesses the adequacy of the relevant transaction parties' (e.g. collateral manager, servicer, back-up servicer and trustee) systems and capacities to perform their respective duties in relation to the transaction. The servicer must also possess adequate capability in managing the purchased assets and servicing the ABS transaction. Although the credit rating of the servicer is generally not the determining factor in assigning the rating to the ABS, it does, however, have a bearing on the rating assigned.
|
| |
|
| |
CLAIMS-PAYING ABILITY
(for details)
RAM Ratings' Claims-Paying Ability ("CPA") rating is intended to portray the relative risk profile of an insurance company, in relation to its ability to meet policyholders’ obligations. As such, a CPA rating is the core rating of an insurer’s financial strength and long-term viability. Conceptually, a CPA rating is the theoretical margin and its stability, by which the insurer’s assets and cash flow are expected to exceed policyholders’ obligations as they come due. This measurement of the likelihood of default on financial obligations is ranked by RAM Ratings' CPA rating scale
RAM Ratings' CPA rating methodology entails a critical assessment of qualitative and quantitative factors to arrive at an opinion on the insurer's future ability to meet its policyholders' obligations, when due. The rating methodology emphasises the insurer's long-term solvency and its ability to maintain adequate liquidity. To this end, RAM Ratings' CPA rating process involves a detailed analysis of an insurer's financial position and trends, as well as an assessment of how that position could be affected by its operations in the future. The analyses can be broken down into 9 key areas:
- Regulatory Environment
- Industry Characteristics and Trends
- Investment Portfolio
- Capital Strength
- Underwriting Quality & Risk Exposure
- Profitability
- Competitive Position
- Ownership Quality
- Management
Based on the CPA rating experience in developed markets, the advantage in having a rating, regardless of the rating accorded, lends credence to an insurer’s financial strength and corporate governance. The act of being rated, in itself, shows transparency in the operations of the insurer. This will help build trust and relationships faster than would otherwise be the case. Some of the benefits of RAM Ratings' CPA ratings are highlighted below:
- Marketing Considerations - The insurance company may use the impartial evaluation of its claims-paying strength as a marketing tool and to differentiate itself from its peers. For policyholders, the CPA rating can be seen as a "guide" for due diligence before acquiring an insurance policy. For example, in project finance involving construction, the strength of the insurer for construction risk can be used in part to assess whether project risk has been sufficiently mitigated.
- Pricing Advantage - In addition to being an effective marketing tool, a good CPA rating allows an insurance company to compete in the market place by offering a lower rate of return or charging a higher premium than it would otherwise pay or charge, if it had either no or lower rating. The lower "risk premium" concept is similar to yields on rated bonds. Theoretically, policyholders would be willing to pay a higher premium to obtain better security for their policies.
- Management Review - The CPA rating process could highlight areas that the management can target for review and to implement improvements. RAM Ratings' assessment can also be used by the management to benchmark itself against the industry. Its shareholders and the Board of Directors would also benefit from an independent report on the fundamental strength of the insurance company.
- Rating Agency Relationship - A CPA rating can be used as a base rating for an insurance holding company as well as for evaluating counterparty risks.
- Second Opinion for Regulators of the Industry - Though not intended for regulatory purposes, the CPA rating methodology, which focuses on the evaluation of an insurance company's financial strength to meet policyholder obligations, can be used by regulators to highlight potential areas of weaknesses in thier quest to protect policyholders' interest
|
| |
|
| |
|
|
|
