Financial Institutions
English Summary:
SCOPE AND OVERVIEW
This S&P Global (China) Ratings methodology applies to ratings on financial institutions, which typically include retail, commercial, and corporate and investment banks. The definition of a financial institution is broad and may also include broker-dealers, mortgage lenders, trust banks, credit unions, building societies, and custody banks. The criteria may also apply to financial or other similar institutions where we deem the criteria appropriate for that analysis.
This methodology articulates the considerations in developing the stand-alone credit profile (SACP) and issuer credit rating (ICR) for a financial or similar institution, including a consideration of the potential for additional support from the financial institution’s parent group or government.
This methodology places emphasis on an entity's operating environment, which includes economic risk and industry risk in setting the starting point or "anchor" in rating a financial institution. The anchor reflects the hypothetical potential SACP of an "average" financial institution in China given its current and expected operating environment. We then assess entityspecific factors, such as business position, capitalization, risk position, and collectively funding and liquidity. By incorporating the entity’s specific charactersitics compared with the anchor, we arrive at the SACP. Lastly, we consider the potential benefit of extraordinary support, which may include either or both potential government support and corporate group support.
Finally, we determine the ICR. The ICR may also benefit from extraordinary group or government support. In some cases the ICR may be weaker than the SACP when we believe the financial institution will extend rather than receive support.
The analysis of two macro factors, economic risk and industry risk, collectively represent the strengths and weaknesses of the broader operating environment that situate, or anchor, the SACP. The SACP may be further modified by an analysis of other factors that affect a financial institution's individual strengths and weaknesses. Based on the analysis of these factors, the SACP may be raised or lowered relative to the anchor. The SACP, after having incorporated the financial institution specific considerations, may be adjusted higher or lower where we deem appropriate.
The ICR may incorporate an analysis of external support, which considers both the relationship between a financial institution and its parent group or government, and how this relationship alters a financial institution’s overall creditworthiness. The ICR, after having incorporated any extraordinary support, may then be adjusted higher or lower where we deem appropriate. This final adjustment, if applied, reflects our view of creditworthiness, refined by considering its relative credit standing among relevant peer financial institutions. Any adjustment, typically reflects our view that one or more strengths or weaknesses are not fully reflected in the SACP, or any implications of support.
METHODOLOGY: SETTING THE ISSUER CREDIT RATING
Anchor
The anchor considers the operating environment, whose macro factors we identify as economic risk and industry risk and reflects the hypothetical potential rating of an average financial institution in China given its current and expected operating environment. Our consideration of an average financial institution may be influenced by the level of dominance or fragmentation within the industry. It is the starting point, or anchor, in rating a financial institution. Industry risk captures our view of the stability of the industry’s institutional guidelines and oversight in China. Economic risk captures our view of the lending environment and market dynamics in China.
Stand-Alone Credit Profile
Economic risk and industry risk represent macro analysis of the creditworthiness of a financial institution while business position, capital and earnings, risk position, and funding and liquidity represent microanalysis.
The SACP may be adjusted up or down the ratings scale after taking into account a financial institution's specific strengths and weaknesses in the following factors:
- Business position,
- Capital and earnings,
- Risk position,and
- Funding and liquidity.
The result of the analysis of the entity-specific strengths and weaknesses is typically a financial institution's SACP. This SACP may include ongoing support but typically does not include extraordinary support. After having incorporated the SACP factors, we may adjust the SACP. This adjustment, if applied, typically reflects our view of a financial institution's specific creditworthiness relative to peers.
Comparative analysis and peer review
The main purpose of comparative analysis and the peer review is to provide context for assessing the rating factors and to set the ICR. Comparative analysis, which can apply differently for different SACP rating factors, helps develop the financial institution's specific analysis. The analyses for business position, risk position, and funding are typically relative while the analyses for capital and earnings and liquidity are typically absolute. Once the impact of any extraordinary support is determined, we may also conduct a final peer review to set the ICR. The peer group is typically comparable financial institutions.
Business Position
Business position measures the strength of a financial institution's business operations. Business position is the combination of specific features of the financial institution's business operations that add to, or mitigate, its industry risk. The analysis of business position typically considers business stability, concentration or diversity, and management and corporate strategy.
Business stability
Business stability is the predictability of continuing business volumes in the face of economic and market fluctuations.
Concentration and diversity of business activities
Concentration and diversity of business activities typically consider the contributions of different business lines and geographies to a financial institutions revenues, compared with financial institutions with a similar industry risk.
Management and strategy
Management and strategy typically considers management's ability to execute operational plans in a consistent manner, a financial institutions strategic direction, management's risk appetite, and ownership and governance. This assessment is typically qualitative.
Capital And Earnings
Capital and earnings typically measures a financial institution's ability to absorb losses. This ability provides protection to senior creditors while the financial institution remains a going concern. The analysis of capital and earnings typically is comprised of an analysis of regulatory requirements, our view of capital adequacy, quality of capital and earnings, and earnings capacity. Our analysis of capital and earnings considers our forward view of their sufficiency to meet expected and potential losses.
Capital and earnings generally consider the degree to which a financial institution's capital and earnings would cover estimated losses that may arise following a substantial economic stress. We may incorporate earnings based on their capacity to absorb losses and build capital. Our capital and earnings analysis may consider whether regulatory capital requirements are being, or will be, met and whether product pricing includes a margin that we expect to be stable and sufficient to cover the expected losses on its assets, and which leaves capital to protect against unexpected losses.
Capital
We typically conduct a capital and earnings analysis. We may consider our view of risk-adjusted capital.
Quality of capital and earnings
The quality of capital and earnings helps determine whether the projected total capital, after any adjustments, has adequately captured additional strengths or weaknesses in earnings or the capital base.
Earnings capacity
An assessment of earnings capacity measures the capacity for earnings to cover normalized losses.
Risk Position
Risk position serves to refine the view of a financial institutions actual and specific risks beyond the conclusion arising from the standard assumptions in the capital and earnings analysis.
To differentiate a financial institutions unique risk position, we may analyze:
How the financial institution manages growth and changes in its risk positions;
- The impact of risk concentrations or risk diversification;
- How increased complexity adds additional risk;
- Whether material risks are adequately captured in our analysis of risk adjusted capital; and
- Comparing past and expected losses on the current mix of business with those of peers.
Funding And Liquidity
The analysis of funding compares the strength and stability of a financial institution’s funding mix with the domestic industry average. The liquidity analysis typically considers a financial institutions ability to manage its liquidity needs in adverse market and economic conditions and its ability to survive over an extended period in such conditions.
Funding
The relative strength and potential volatility of funding are typically considered by reviewing a financial institution’s liabilities, including mixture of retail and wholesale deposits, interbank loans, and secured and unsecured borrowing in capital markets.
Liquidity
The main differentiators for liquidity are a financial institution’s relative dependence on central bank funding and its ability to access other liquidity sources.
Comparing the uses and sources of liquidity
The analysis typically seeks to find the balance between a financial institution's expected and contingent uses for liquidity and its sources of reliable liquidity during adverse market and economic conditions.
Issuer Credit Rating
Support Framework
The analysis of group or government support considers the likelihood of support from a group or government into the ratings on a financial institution by assessing the relationship between the parties. When we believe the support from either or both is ongoing and expected to remain ongoing, we may factor it into our SACP. We may also consider the potential of support when establishing the ICR.
Enterprise Risk Management
As part of our ratings analysis, we consider how well a financial institution's risk policies, procedures, and tools, fit its risk profile and contribute to its strategic and commercial development. When they are unusually strong or weak relative to its peers, a financial institution’s risk management can affect our analysis of the bank's management and strategy, risk position, and funding and liquidity.
OTHER CONSIDERATIONS
A financial institution may have a diverse scope of activities that it engages in (e.g., retail, commercial, derivatives, wealth management) as well as markets in which it participates (e.g., coverage of a local area, or national or international). We typically consider the overall product and market exposures of the financial institutions in our analysis.
This methodology is not intended to be an exhaustive list of all factors we may consider in our analysis. Where appropriate, we may apply additional and/or different, quantitative and/or qualitative, considerations in our analysis to reflect the circumstances of the analysis for a particular issuer, issue or security type. A rating committee may adjust the application of the methodology to reflect individual circumstances in our analysis.