By BankingMyWay.com Staff
Credit ratings provide a measurement of the probability that an entity will be able to meet financial obligations. Just as individual consumers have credit ratings to predict their creditworthiness, so too do corporations and financial institutions. There are several agencies that provide credit rating opinions, but the three top agencies are Moody’s, Standard & Poor’s and Fitch.

Bank credit ratings evaluate the likelihood that a bank will need external support to prevent failure if it gets into financial difficulty. Numerous factors go into determining a financial institutions credit rating, including capital adequacy, asset quality and funding/liquidity. Additionally, the operating performance and business profile of a bank is considered. Evaluating operating performance takes into consideration profitability and market positioning. Evaluating the business profile considers how external influences on the bank like economic forces and regulation, as well as internal influences through management and strategy effect the bank’s strength and stability.

By examining the financial statements and other records of financial institutions, credit rating agencies form an opinion on the probability that a bank will be able to honor financial obligations both in the short-term and long-term. Credit ratings are not meant to be used as predictors of future trouble. They are intended to predict how a financial institution would hold up if it were to encounter adverse market conditions. Just like consumer credit ratings, issuer credit ratings are continuously monitored and updated as circumstances change. 

The different credit rating agencies have slightly different rating designations, but there are similarities. Moody’s and S&P both use AAA as the highest rating for long-term issues, and Fitch also uses AAA for its highest international ratings (Moody’s uses Aaa). The AAA credit rating means the financial institution is of the highest quality, and there is minimal risk of default on debts. AA and A are the next highest ratings. These ratings still reflect strong capacity to meet debt obligations, but these institutions may be slightly more vulnerable to adverse changes in the market.

BBB is the next ratings level for S&P and Fitch. This level is designated Baa for Moody’s. This level indicates that a financial institution has adequate capacity to meet debt obligations, but is even more vulnerable to adverse changes in the market. Moody’s employs numerical gradations among its ratings (i.e. Aa1 or Baa1). S&P and Fitch use “+” and “-“ as gradations. All of the ratings levels from BBB (Baa) to AAA (Aaa) are considered “investment grade,” which indicates low to moderate risk.

Institutions with ratings between BB and D, or Ba1 and C for Moody’s, are considered “speculative grade.” The speculative ratings indicate that the financial institution carries a higher level of risk or is already in default.

Short-term repayment risk is expressed with different designations. Moody’s uses P-1, P-2, P-3 and NP in descending order to rate an issuer’s ability to repay short-term debt obligations. S&P and Fitch both use A1+, A1, A2, A3, B and C to rate short-term repayment risk.

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