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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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Presentation Outline
Bank’s Risk – A bird’s eye-viewBank’s Risk – A bird’s eye-view
Rating MethodologyRating Methodology
CRAB's Presentation 3
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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
CRAB's Presentation 4
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
CRAB's Presentation 5
Commodity Risk
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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 6
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RATING PROCESS FLOW
Rating Frame Work
Analysis and Evaluation
Rating Committee Meeting
CRAB's Presentation 7
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
CRAB's Presentation 8
WeightWeight XX Qualitative RatingQualitative Rating
FINAL RATINGFINAL RATING
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CRAB’s Rating Methodology
CRAB's Presentation 9
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CRAB’s Rating Methodology
CRAB's Presentation 10
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Analysis Process of Profitability
CRAB's Presentation 11
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Analysis Process of Profitability
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Analysis Process of Profitability
CRAB's Presentation 13
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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
CRAB's Presentation 16
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
CRAB's Presentation 19
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FACTOR : EARNINGS AND VOLATILITY
CRAB's Presentation 20
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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
CRAB's Presentation 21
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
CRAB's Presentation 22
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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
CRAB's Presentation 26
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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
CRAB's Presentation 27
• 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
CRAB's Presentation 29
• 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
CRAB's Presentation 30
• 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
CRAB's Presentation 31
• 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
CRAB's Presentation 32
• 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
CRAB's Presentation 33
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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
CRAB's Presentation 34
• 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
CRAB's Presentation 35
• 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
CRAB's Presentation 36