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The Changing Face of Bank Analysis: Recent Developments in The Discipline
The Changing Face of Bank Analysis: Recent Developments in The Discipline
The Changing Face of Bank Analysis: Recent Developments in The Discipline
BANK ANALYSIS
Recent Developments in the
Discipline
WHY DO BANK ANALYSIS?
Bank analysis is a developing discipline.
Old perception that as banks rarely default they are
strong counterparties is out of date.
Define what is meant by bank default?
Basel 2/Portfolio Management mean that capital allocation is
more sensitive to overall portfolio quality, including that of banks.
Increased ability to collateralize counterparty risk in the
derivatives market.
Decisions need to be taken about hedging credit risk in the credit
derivatives market.
Banks role in structured finance/securitization transactions
requires a more pro-active approach.
No longer enough to just consider whether a bank will
default or not.
BANKS DONT DEFAULT OFTEN
Although only limited bank defaults have occurred in
recent years, with the Argentina crisis, the number has
increased in recent years.
FITCH DEFAULT DATA
In the period of 1990 2003, banks rated
by Fitch defaulted less frequently than
corporates rated by Fitch.
Average Cumulative Default RatesWorldwide
One-Year Two-Year Three-Year Four-Year Five-Year
(%) Bank Corp. Bank Corp. Bank Corp. Bank Corp. Bank Corp.
AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.04 0.00 0.09
A 0.00 0.05 0.04 0.21 0.05 0.34 0.06 0.48 0.07 0.59
BBB 0.19 0.38 0.63 1.26 0.79 1.98 1.32 2.84 0.72 3.28
Investment 0.03 0.12 0.11 0.43 0.13 0.67 0.16 0.90 0.09 1.04
Grade
High Yield 2.36 4.33 5.27 7.27 3.99 7.35 6.73 8.79 8.97 9.31
All Ratings 0.27 0.77 0.58 1.44 0.47 1.65 0.50 1.94 0.48 2.08
Source: Fitch Ratings, Fitch Bank Failures Study 1990 - 2003: March 2005
FITCH TRANSITION DATA
Measures number of ratings in each category
which were still in that category 12 months later.
For AA and A ratings, banks more stable.
AAA rated banks less stable with more downgrades, which will
accelerate with the end of the Landesbank guarantee.
Average Annual Worldwide Corporate (incl. Banks) Transition Matrix;
1990 2003
(%) AAA AA A BBB BB B CCC C D Total
AAA 96.54 3.31 0.14 0.00 0.00 0.00 0.00 0.00 100.00
AA 0.09 90.99 8.47 0.40 0.03 0.03 0.00 0.00 100.00
A 0.03 2.50 91.78 5.29 0.24 0.02 0.10 0.05 100.00
BBB 0.00 0.25 4.85 89.26 3.97 0.87 0.40 0.40 100.00
BB 0.07 0.13 0.20 7.33 79.39 8.06 2.71 2.11 100.00
B 0.00 0.00 0.00 0.51 8.09 83.83 5.01 2.57 100.00
CCC - 0.00 0.00 0.00 0.44 0.00 10.62 58.85 30.09 100.00
C
Average Annual Worldwide Bank Transition Matrix; 1990 2003
(%) AAA AA A BBB BB B CCC - C D Total
AAA 93.40 6.60 0.00 0.00 0.00 0.00 0.00 0.00 100.00
AA 0.10 92.11 7.63 0.10 0.00 0.05 0.00 0.00 100.00
A 0.00 4.02 92.66 3.25 0.04 0.04 0.00 0.00 100.00
BBB 0.00 0.63 9.01 87.74 1.99 0.42 0.00 0.21 100.00
BB 0.00 0.60 0.30 12.61 68.17 12.91 4.50 0.90 100.00
B 0.00 0.00 0.00 0.40 14.23 82.21 2.77 0.40 100.00
CCC - 0.00 0.00 0.00 0.00 0.00 18.46 61.54 20.00 100.00
C
Source: Fitch Ratings
FITCH BANK FAILURE DATA
Failure (intervention) vs. Default (bankruptcy) of Banks
Support is key to preventing default of banks.
Support is more likely to be available to banks than non-bank corporates.
Data below shows that bank failures are MORE LIKELY
than corporate defaults.
The difference increases with the time period under examination.
Securities Capital
Deposits Issued