HONG KONG, 12 June 2018. Pengyuan International has today published its Global Bank Rating Criteria for public consultation. The criteria report is available via the following link: Global Bank Rating Criteria.

Our Global Bank Rating Criteria report sets forth our methodology for assigning ratings to banking institutions and their debt instruments. Our analytical approach for banks follows a four-pillar framework. We believe the score for each pillar – and the way pillar scores are combined – convey useful information on the building blocks of a bank’s creditworthiness and the inflection points that may cause its ratings to change. The four pillars that support our rating opinions are:

Pillar 1: Banking System Credit Index (BSCI). The BSCI expresses our view on a banking system’s overall credit quality over the cycle. To establish a relative ranking of banking markets, we review each country’s business environment, with an emphasis on economic performance and institutional strength. In addition, we assess a banking industry’s competitive dynamics, regulatory landscape, and vulnerability to private-sector leverage.

Pillar 2: Business Profile Assessment. Our business profile assessment focuses on the strengths and weaknesses of a banking franchise, with regards to its strategic and risk framework, management and governance, and balance-sheet management. An understanding of these qualitative aspects of an organization enables us to put its financial data into perspective and make an informed judgement on its ability to deliver on its objectives.

Pillar 3: Capital Formation Assessment. Under Pillar 3 of our framework, we assess a bank’s ability to generate capital internally via retained earnings, which are a critical source of capital strength for banks as going concerns. Starting with a bank’s returns on assets and equity, we evaluate a bank’s earnings resilience based on a range of profitability indicators. Ultimately, these metrics allow us to form a comprehensive and forward-looking view on an entity’s sustainable return on capital.

Pillar 4: Capital Adequacy Assessment. The final building block of our framework is concerned with a bank’s existing and prospective balance-sheet strength. Our assessment is driven by our analysis of a bank’s capital adequacy ratios, asset quality, and funding and liquidity. In addition to our base-case expectations, we may perform sensitivity tests and scenario analyses to measure a bank’s capital performance under adverse operating conditions.

Our four-pillar analysis generates an indicative credit score (ICS), which expresses our preliminary view on an entity’s standalone creditworthiness. The ICS may be adjusted upwards or downwards based on factors beyond those considered in our standard scorecards. The adjusted score represents an entity’s standalone credit profile (SACP), which reflects our opinion on a bank’s viability as a going-concern in the absence of external support.

Our external support analysis builds upon the SACP of a rated entity by incorporating the potential for capital and / or liquidity infusions from the bank’s shareholder(s) or the public sector under stress scenarios. A bank’s credit ratings may benefit from its status as a government-related entity, importance to the financial system, or membership of a broader business organization.

In assigning issuance ratings, we consider a fixed-income instrument’s subordination, conversion features, and loss absorption characteristics, among other factors. In the vast majority of cases, a bank’s senior unsecured debt ratings are aligned with its long-term issuer credit rating. The ratings on junior and hybrid instruments are notched down based on our evaluation of their covenants and expectations on issuer and regulatory behavior.

These criteria will become effective upon final publication. We intend to review all affected ratings, if any, within the next six months. At this point, we expect no impact on our existing rating portfolio.