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Friday, October 7, 2011

Moodys Bank Financial Strength Ratings


In the past few days there have been many news flashes about Moody's changing the Bank Financial Strength Ratings for banks in India. The most significant of which was, the downgrading of State Bank of India, the nations premier state owned banking institution from C- to D+. This caused shock waves across the stock market and the SBI shares tumbled to their 2 year low.

The purpose of this post is to understand what this Bank Financial Strength Rating is and understand the different ratings available.

What is this Bank Financial Strength Rating?

"Moody's Bank Financial Strength Ratings reflect Moody's opinion of a bank's intrinsic or stand-alone financial strength relative to all other rated banks globally."

This BFSR is a measure of the likelihood that a bank will require financial assistance in order to avoid a default.

What are the different Ratings available?

Rating Name Rating Description
A Banks rated A possess superior intrinsic financial strength. Typically, they will be institutions with highly valuable and defensible business franchises, strong financial fundamentals, and a very predictable and stable operating environment.
B Banks rated B possess strong intrinsic financial strength. Typically, they will be institutions with valuable and defensible business franchises, good financial fundamentals, and a predictable and stable operating environment.
C Banks rated C possess adequate intrinsic financial strength. Typically, they will be institutions with more limited but still valuable business franchises. These banks will display either acceptable financial fundamentals within a predictable and stable operating environment, or good financial fundamentals within a less predictable and stable operating environment.
D Banks rated D display modest intrinsic financial strength, potentially requiring some outside support at times. Such institutions may be limited by one or more of the following factors: a weak business franchise; financial fundamentals that are deficient in one or more respects; or an unpredictable and unstable operating environment.
E Banks rated E display very modest intrinsic financial strength, with a higher likelihood of periodic outside support or an eventual need for outside assistance. Such institutions may be limited by one or more of the following factors: a weak and limited business franchise; financial fundamentals that are materially deficient in one or more respects; or a highly unpredictable or unstable operating environment.

A point to note is that wherever appropriate, a "+" modifier will be appended to ratings below the "A" category and a "-" modifier
will be appended to ratings above the "E" category to distinguish those banks that fall in intermediate categories. So, a B+ is better than a B and a C- is better than a D.

This post is just the introduction about these Banking Financial Strength Ratings. Watch out for more articles on how it is calculated in future!!!

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