Rating service produces apparently bizarre results
A new service ranking financial institutions according to their strength, quality and profitability (SQP) launched by Interest produces some apparently bizarre results.
Monday, March 7th 2005, 9:57PM
by Jenny Ruth
Unsurprisingly, the four major banks all score AAA rankings, as does the ANZ Bank-owned UDC Finance.
South Canterbury Finance is a highly respected company so it probably doesn’t raise too many eyebrows that it also has a AAA ranking.
But should Rod Petrevic’s Bridgecorp also score a AAA ranking? Grosvenor Financial Services Group’s Bondwatch ranks Bridgecorp as G6, G1 being its highest ranking.
A G6 ranking means "ability to meet current obligations dependent upon favourable economic and/or business conditions, concerns about security over the longer term."
Grosvenor gives South Canterbury Finance a G4 ranking which means "reasonable ability to meet obligations, possibility of credit concerns developing should future business conditions become less favourable."
And should HSBC be ranked BBA? Or Fisher & Paykel Finance and Pacific Retail Finance share the same BBB ranking?
David Chaston at Interest says his rankings are entirely quantative and involve no value judgements beyond deciding what measures, ratios, values and weightings go into the mix in the first place.
The end result is a mechanical process. "We’re not rating in any shape or form," he says.
"It’s not intended to be an end-game decision-making tool. It’s a beginning, short-listing tool."
He says the information is all prepared from the point of view of the depositor. That’s why Bridgecorp’s New Zealand subsidiary is used, rather than its parent company, and why only HSBC’s New Zealand performance is considered, rather than its global parent.
While the management of a finance company strives to achieve a one-for-one match between the maturities of its deposits and the maturities of its loans, from a depositor’s point of view it’s better for the company to have a deposit over-hang, or more deposits coming in than lending going out, Chaston says.
And while many analysts would say redeemable preference shares should be treated as debt, the SQP system is that if the deposits rank ahead, the shares can be treated as equity.
The rankings are also relative. A particular institution may have a good year but see its ranking fall because the rest of the industry has had an even better year, Chaston says.
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