Why it matters: A solid, defensible franchise generates and sustains recurring earnings, creates economic value, and maintains risk protection.
How it is assessed: Moody’s looks at four supporting sub-factors of franchise value: 1) market share and sustainability; 2) geographic diversification; 3) earnings stability; and 4) earnings diversification.
Why it matters: A bank’s revenue is compensation for taking calculated risks; managing risk—be it credit, market, trading, reputation, or operational—underpins a bank’s strategy and success.
How it is assessed: Moody’s considers six sub-factors in assessing a bank’s risk positioning: 1) corporate governance; 2) controls and risk management; 3) financial reporting transparency; 4) credit risk concentration; 5) liquidity management; 6) market risk appetite.
Why it matters: Bank regulators aim to protect bank depositors and promote a healthy bank system that fosters economic growth and development.
How it is assessed: Effective bank regulators demonstrate independence, credibility, enforcement powers, and standards consistent with global best practices. Regulators are assessed on these criteria based upon the observations and experience of Moody’s analysts globally.
Why it matters: Volatile economic cycles, political decisions, weak legal systems, and irrational competitive environments can act alone or in combination to impair a bank’s creditworthiness, making some banks “victims of their environments.”
How it is assessed: Moody’s analysis of operating environment begins with three quantifiable measures: 1) economic stability; 2) integrity and corruption; and 3) legal system. For banks with substantial (over 20%) assets or profits in another country, Moody’s analysis considers the “blended” operating environment in arriving at its opinion.
Why it matters: Using financial fundamentals to compare banks is straightforward. Also, by looking at financial fundamentals, we can verify or falsify performance assumptions based on past trends.
How it is assessed: Moody’s analysis considers 1) profitability; 2) liquidity; 3) capital adequacy; 4) efficiency; and 5) asset quality.
Read the methodology: Moody’s Bank Financial Strength Ratings: Global Methodology
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