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ABSTRACT
Credit rating agencies such as Fitch, Standard & Poor’s and Moody’s do not mention the difference in
impact of affecting factors on credit ratings of commercial banks between developed markets and emerging
markets. However, some researchers have pointed out there is difference in affecting of finacial ratios to credit
rating of commercial banks between developed markets and emerging markets.
Thesis’s objective is to investigate the difference in impacting of systematical factors such as national
risk, banking system risk in country where the banks locate and specific factors of banks as ownership structure,
bank size and finacial ratios on bank credit ratings between developed markets and emerging markets.
First, we use One way anova analysis and choosing indepent variables for ordered logit model method to
indentify factor affecting to bank credit ratings in developed markets and emerging markets.
The results of the thesis indicate that systematical factors have a stronger impact on bank’s credit ratings
in emerging markets than developed markets. Meanwhile, financial ratios have less impact on bank’s credit
ratings in emerging than developed markets. Moreover, the thesis shows the existence of the difference in
affecting of ownership structure to bank’s credit rating between developed markets and emerging markets.
Basing on the empirical results, we have some policy implications for central banks of emerging markets
to raise the bank’s credit ratings in their countries. We also imply some methods for commercial banks in
emerging markets to enchance their credit ratings.
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CHAPTER 1: INTRODUCTION
1.1 Study background
Investors and depositors have a great concern about bank’s credit rating. However, credit rating agencies
do not mention details the way and level of impacting of affecting factors on bank’s credit ratings. Besides, some
empirical studies have indicated there is difference in level of impacting of financial ratios on the credit ratings
of commercial banks in developed markets and emerging markets.
So it is essential to identify the difference in impacting of affecting factors on bank’s credit rating in
developed markets and emerging markets.
1.2 Research problem
Due to the study background above, we carry out the study to solve the detail research objectives
following:
Identify the difference in impacting of systematical factors such as national risk, banking sector risk and
bank specific features such as bank size, form of ownership and financial ratios on bank’s credit rating in
developed and emerging markets.
1.3 Research questions
Firstly, is there difference in impacting of systematical factors as national risk and banking sector risk on
bank’s credit rating between developed markets and emerging markets.
Secondly, is there difference in affecting of specific features as bank scale, form of ownership and
financial ratios to bank’s credit rating between developed markets and emerging markets.
1.4 Research objectives
(1): Analyze and compare the impact of systematical factors such as national risk and banking sector risk on
bank’s credit rating between developed markets and emerging markets.
(2): Analyze and compare the impact of specific features includes bank size, form of ownership and
financial ratios on bank’s credit rating between developed markets and emerging markets.
1.5 Scope of this study
The thesis focus on analyzing bank’s credit ratings and affecting factors to bank’s credit ratings at
developed markets and emerging markets in the period from 2010 to 2015.
1.6 Academic and empirical meaning of this study
1.6.1 Academic meaning
First, the thesis identifies the affecting factors to bank’s credit ratings at developed markets and
emerging markets
Second, this study indicates the difference in the impact of systematical factors and specific feature of
commercial banks to their credit ratings between developed markets and emerging markets.
1.6.2 Empirical meaning
First, identifying affecting factors and the impact level of these factors on bank’s credit ratings helps
banking governors in emerging markets define the credit risk of commercial banks. Moreover, the empirical
results of the thesis supply more reference foundation for banking governors in emerging markets to issue
regulations for ensuring the safety of commercial banks and enhancing the bank’s credit ratings in these
countries.
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Second, defining the affecting factors on bank’s credit ratings helps commercial banks to choose suitable
solutions to raise their credit ratings.
1.7 Contribution of this thesis
The contribution of this study to the empirical literatures relating to bank’s credit ratings is that this
study clarifies the difference in the impacts of national risk, banking sector risk, bank size, form of ownership
and bank’s financial ratios to bank’s credit rating between developed markets and emerging markets.
1.8 Structure of this thesis
Chapter 1 “Introduction”.
Chapter 2 “Bank’s credit ratings in developed markets and emerging markets”.
Chapter 3 “Methodologies”.
Chapter 4 “Empirical results and analysis”.
Chapter 5 “Conclusions and policy implications”.
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CHAPTER 2: BANK CREDIT RATINGS IN DEVELOPED MARKETS AND
EMERGING MARKETS
2.1 The overview of bank’s credit ratings
2.1.1 Concepts of bank’s credit ratings
Bank’s credit ratings issued by credit rating agencies are ordinal measures that should not only reflect
the current positions of banks but also provide information about their future financial positions (Bellotti et al,
2011a).
2.1.2 Bank’s credit rating methodologies
2.1.2.1 The Uniform Financial Institutions Rating System - UFIRS
This system is adopted by the Federal Financial Institutions Examination Council in 1979. At first, this
system is applied in United State. After that this system is used by many countries due to the recommendation of
the Federal Reserve.
2.1.2.2 Bank’s credit rating methodologies of credit rating agencies
Fitch evaluates the bank’s credit rating through 2 phases:
Phase 1: Accessing bank’s viability rating – VR bases on 5 factors: operating environments, bank size,
management capability, risk management and financial positions of commercial banks.
Phase 2: Accessing bank’s final credit ratings by combining bank’s viability ratings and supports from
government and group.
The same as Fitch, Standard & Poor’s evaluates bank’s credit rating within 2 steps:
Step 1: identify bank’s stand alone credit profile bases on 6 factors include: economic risk, industry risk of
country where banks locate; business position; capital and earnings; risk position; funding and liquidity.
Step 2: evaluate bank’s final credit rating by combining bank’s stand alone credit profile and external
supports from government and group.
2.2 The affecting factors on bank’s credit rating
According to The Uniform Financial Institutions Rating System and bank’s credit rating methodologies
of credit rating agencies, we realize that bank’s credit ratings are affected by the following factors: economic
risk, industry risk of country where banks locate, external supports from government and group and some
specific features of banks.
2.2.1 The affecting of macro factors on bank’s credit ratings
Banking operations are very sensitive to macro factors’ varieties. Especially, changes in economic
policies or political systems have strong affects on bank’s credit ratings in these countries.
2.2.2 The affecting of government supports and group supports on bank’s credit ratings
Fitch (2104) supposes that government supports to belonging commercial banks help to improve these
banks’ credit ratings.
Moreover, supports of big and prestige groups have positive impacts on banks’ credit ratings. According
to Moody’s (1999), groups utilize their scale advantages, risk diversification capabilities and management
experience to help belonging commercial banks.
2.2.3 The affecting of specific features on banks’ credit ratings
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According to Standard & Poor’s (2011a), specific features of commercial banks have impacts on bank’s
credit rating included: bank size and business position; asset quality; capital and earnings; funding and liquidity.
Credit rating agencies analyze these factors to identify bank’s stand alone credit profiles. After that, credit rating
agencies combine bank’s stand alone credit profiles, economic risks and supports from governments or groups to
determine bank’s credit rating.
2.3 Economic features and commercial bank characteristics in developed markets
2.3.1 Economic features in developed markets
First, developed countries have a high level of per capita GNP.
Second, developed countries have post-industrial economies.
Third, developed countries have a high standard of living.
2.3.2 Commercial bank characteristics in developed markets
First, banking system in developed countries has a high degree of competition.
Moreover, commercial banks in developed markets have a higher level of services diversification than
commercial banks in emerging markets.
Finally, the regulatory frameworks controlling the banking operations in developed countries are better
than emerging markets.
2.4 Economic features and commercial bank characteristics in emerging markets
2.4.1 Economic features in emerging markets
First, emerging markets are countries being in transition process from a closed and less developed
economy to an opened and developed economy.
Second, instability of financial system in emerging markets is an important feature discussed by a lot of
researchers.
Third, financial liberalization is taking place in emerging markets to over come the instability of
financial systems.
Final, GDP growth rates in emerging markets are usually higher than developed markets.
2.4.2 Bank characteristics in emerging markets
First, asset and loan growth rates of commercial banks in emerging markets are at high level.
Second, Suarez (2001) indicates that equity capital of commercial banks in emerging markets do not
present the financial capability of commercial banks as in developed markets.
Third, earning capability of commercial banks, presented by net profit/average total assets ratio, in
emerging markets is higher than commercial banks’ in developed markets.
Final, quality of financial information issued by commercial in emerging markets is not reliable (Vives,
2006). In these countries, issuing financial information of commercial banks has a lot of problems due to slow
intuitional reforms.
2.5 The impact of information asymmetry on bank’s credit rating in emerging markets
2.5.1 Concept of information asymmetry
Information asymmetry occurs when one party of a financial transaction have more sufficient
information than the other party. And this may lead to moral hazard or adverse selection.
2.5.2 The reasons cause the impaction of information asymmetry on bank’s credit rating in emerging markets