Bank Ratings

Bank Ratings

There are three institutions that are well known for ratings of banks accoring to risks for investors. They are: Moody's Investors Service (Moody's), Standard & Poor's (S&P) and the Fitch Group with their Fitch Ratings and Fitch Solutions. For this discussion, we will use Moody's, Standard & Poor and Fitch.

Moody's

Moody's is well know for their rankings on the creditworthiness of borrowers through their standardized ranking scale. The ranking scale measures the expected loss to investors should there be a default. Debt securities from several market segments are rated and these include both public and commercial securities available in the bond market. Ratings vary between Aaa (highest) to c (lowest).

The following table depicts the Moody's rating structure.

Investment grade
Aaa	Rated as the highest quality and lowest credit risk.	Prime-1 Best ability to repay short-term debt
Aa1	Rated as high quality and very low credit risk.
Aa2
Aa3
A1	Rated as upper-medium grade and low credit risk.
A2		Prime-1/Prime-2 Best ability or high ability to repay short term debt
A3
Baa1	Rated as medium grade, with some speculative elements and moderate credit risk.	Prime-2 High ability to repay short term debt
Baa2		Prime-2/Prime-3 High ability or acceptable ability to repay short term debt
Baa3		Prime-3 Acceptable ability to repay short term debt
Speculative grade
Ba1	Judged to have speculative elements and a significant credit risk.	Not Prime Do not fall within any of the prime categories
Ba2
Ba3
B1	Judged as being speculative and a high credit risk.
B2
B3
Caa1	Rated as poor quality and very high credit risk.
Caa2
Caa3
Ca	Judged to be highly speculative and with likelihood of being near or in default, but some possibility of recovering principal and interest.
C	Rated as the lowest quality, usually in default and low likelihood of recovering principal or interest.

Standard & Poor (S&P)

Standard & Poor is part of the McGraw-Hills publisher and is responsible fo the publication of financial research and abalysis on bonds and stocks. It is an United States based company. S&P specialises in reasearch of stock market indices. the US based S&P500, Australian S&P/ASX200, Italian S&P/MIB, India's S&P CNX Nifty and the Canadian S&P/TSX.

A rating schedule for borrowers are done using a scale of AAA which indicates a strong capacity to meet financial commitments.

Rating Schedule for borrowers
AAA	Strong capacity to meet financial commitments and is the highest rating.
AA	Very strong capacity to meet financial commitments.
A	Strong capacity to meet its financial commitments. Is however more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB	Adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Non-Investment Grade (also known as junk bonds)
BB	An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.
B	An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
CCC	An obligor rated 'CCC' is currently vulnerable, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.
CC	An obligor rated 'CC' is currently highly vulnerable.
C	Highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
CI	Past due on interest.
R	An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the execution of the regulatory supervision, the regulators may have the power to favour one class of obligations over others or pay some obligations and not others.
SD	Has selectively defaulted on some obligations.
NR	Not rated.
Short-term issue credit ratings
A-1	Obligor's capacity to meet its financial commitment on the obligation is strong
A-2	Is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory
A-3	Adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation
B	Has significant speculative characteristics. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impact its financial commitment on the obligation
C	Currently vulnerable to non payment and is dependent upon favourable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation is in payment default.
D	Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition.

Fitch

Fitch ratings not only do ratings but through research, data and prospective credit opinions also provide value over and above ratings alone.

Long-term credit ratings
Investment grade
AAA	The best quality companies, reliable and stable
AA	Quality companies, a bit higher risk than AAA
A	Economic situation can affect finance
BBB	Medium class companies, which are satisfactory at the moment
Non-investment grade
BB	More prone to changes in the economy
B	Financial situation varies noticeably
CCC	Currently vulnerable and dependent on favourable economic conditions to meet its commitments
CC	Highly vulnerable, very speculative bonds
C	Highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
D	Has defaulted on obligations and Fitch believes that it will generally default on most or all obligations
Short-term credit ratings
F1+	Best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment
F1	Best quality grade, indicating strong capacity of obligor to meet its financial commitment
F2	Good quality grade with satisfactory capacity of obligor to meet its financial commitment
F3	Fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments
B	of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions
C	possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favourable business and economic conditions
D	the obligor is in default as it has failed on its financial commitments.