What determines bank ratings? Management of Financial Institutions
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- II. Data
IntroductionThe objective of this paper is to find the main factors which could have an influence on the rating of a bank such as factors related to the liquidity, the profitability or the asset quality of a financial institution. This paper will be separated into four sections. In section I, we will describe how we gathered our database and describe the composition of our sample. In the second section, we will explain the methodology we used to make of this study a successful one. You will thus not only find in this part of the paper which variables we decided to use but also why we decided to pick these ones and not other ones. Afterwards, we will show the results obtained from our PCA analysis followed by a logit model. It means that we will describe the composition of each factor and how it can be interpreted. Likely to these interpretations, we will give you what will be the impact of these factors on ratings and if this impact is statistically significant or not. Finally, this paper will end with a brief conclusion summarizing our findings. II. DataSample Construction In order to have a relevant sample to realize our study, we have to impose some criteria. Indeed, we are not interested by all gender of financial institution such as on a geographical point of view. Such a restriction is one of the six criteria we imposed to Bankscope. These specifications are the following (see Table 1). The first criterion was to select banks that have long-term Fitch ratings. After applying this specification, we still have a sample of 1.271 banks which can be considered as a too large sample. Secondly, we asked to Bankscope to exclude of this sample all financial institutions which have a consolidated code different from C. We use such a criterion in order to be sure that we get sufficient information concerning the balance sheet, the income statement and different financial ratios which could be used as explanatory variables. It reduces our sample to 548 banks. Knowing that our analysis is a cross-sectional one, we also have to impose that data of banks constituting our sample have to be available for the year 2001. More than the above criteria, we also add a restriction relative to the activity of the different banks which could be included in our sample. Indeed, we asked only for saving, commercial, real estate and investment banks or security houses. We use this criterion for a specific reason: we want to be able to analyze if the activity of a bank has an impact on its rating. After having restricted our sample following the previous specifications, Bankscope still gives us a sample of 339 banks. It can be easily justified by the presence in this sample of financial institutions which are settled in all countries of the European continent. However, we decided to limit our sample to European banks excluding Eastern European countries. The reason for that is that including the sample with Eastern European countries would distort our sample because of the low-developed banking system in those countries characterized by low ratings. The effect of imposing this geographical constraint is to reduce our sample to 143 banks from which we will delete one bank with a rating AAA because it is only due to its activity as a state bank. After imposing those criteria, we found a sample of 142 banks. After a first look at our sample, we have deleted 5 banks because we had not a lot of data for them.1 Thus, we finally obtain a sample of 137 Western European banks. Moreover, we also decided to delete the outliers for the variables used in the Principal Component Analysis but it will be explain in section III (see appendix X). Table 1: Criteria imposed to construct our sample
Source: Bankscope B. Descriptive Statistics Geographical repartition In this section, we describe the composition of our sample after having explained how we constructed it in the previous section. Afterwards, we analyze this sample more in depth in order to detect the presence of some clusters of rating regarding to the activity and the country of different banks included in our sample. As you can observe in the two tables below, we have proceeded to a repartition of ratings for each country where the financial institution comes from (Table 2) and for each specialisation (Table 3). In table 2, there are some facts that can be easily observed. Indeed, we can see that our sample is geographically well diversified despite a strong presence of Spanish banks (40%). This presence could be explained by the fact that mergers and acquisitions in the Spanish banking sector has not really started yet. It involves that there are a lot of Spanish banks which are all in the smallest of the sample on a size criterion. Table 2: Repartition of ratings across countries
Source: Bankscope Turning now to the repartition of ratings across our sample, we can see that they vary from AA+ to BBB. However, there is a concentration of banks which are rated A+ (24%) and A (25%) and the rest of our sample is more or less equally dispersed on each side of these ratings. You can still observe a weak proportion of banks with BBB or BBB+ ratings but this proportion was larger before the extraction of outliers and banks for which there were not enough data as it will be explained in the next section. We will now deepen our description by trying to group countries in different regions and try to see if there are any link between the initial region of a bank and its rating (Figure 1). F  igure 1: Repartition of the ratings across geographical regions
We distributed banks of our sample across 4 European regions depending on the country where they are located. The first region is the Central-European (1,00) region with Germany, Belgium, Netherlands, Luxemburg, Austria and France. The second region is the Southern region (2.00) with the countries Italy, Spain, Portugal and Greece. A third block is Scandinavian countries (3.00) Finland, Sweden and Denmark. The fourth region consists out of Anglo-Saxon countries (4.00) such as Great Britain and Ireland. In Central-Europe We can observe that banks based on the Central-European region have on average a best rating than banks from other regions despite the good performance on average from Scandinavian banks. At the opposite, we can easily observe that Southern banks are the worse ones and thus logically have the lowest rating from European continent on average. This could be considered like an indication that generally countries within the Southern region have less developed banking systems than countries from other regions of Europe excluding Eastern Europe. However, it must only be considered as an indication of stability because there are a lot of other factors which define the stability of a banking system. Another reason can be that the central region even as the northern region has a better performance because they passed the first wave of mergers and acquisitions which could indicate that due to this reason the inefficient and low rated financial institutions are acquired or disappeared. Activity repartition If we have a look at Table 3 and figure 2 which present numerically and graphically the repartition of ratings regarding to bank specialisation, we can observe that the commercial activity largely dominates the other three which are considered in this sample. Indeed, the share of commercial banks is almost 60% when saving, real estate and investment banks represent respectively only 25, 10 and 4% of our sample. If you take each type of business independently, the average rating of commercial and real estate European banks is A+ where it is only A for saving and investment Table 3: Repartition of ratings across specialization
Source: Bankscope banks. Another element that can also be extracted from Table 3 is that commercial banks seem to be the most efficient ones regarding to performances of other kind of activity. At the opposite, as a first impression, it appears disadvantageous to work as a saving bank in Europe. At a first sight, it involves a lower rating which could explain a lower degree of financial quality as a financial institution. Figure 2: Rating and specialisation of the bank T  he above observation highlighting a strong presence of commercial financial institutions inside our sample, confirmed by Figure 2 on the right, could be justified by two facts. On the one hand, the investment banking is mostly done by major players which are scarce in Europe. On the other hand, it can be due to the fact that there exist a lot of real estate and saving banks that have not got a long term Fitch rating yet or are not consolidated yet but only part of a bigger organisation that mostly will be a commercial bank. Keeping this in mind we can conclude that the deviation for commercial banks include all ratings when for other specialisations the dispersion is less observable because of a distortion in our sample which could be due to a missing rating or consolidating status.
For the smaller real estate and saving banks it is important to have a good rating because they can by lowering the rating be confronted with two threats. A first one is because it is smaller then the big banks it has to do more effort to gather deposits from the public. A worse rating could impose a flight to the big banks certainly when you are operating in a country with less financial stability. A second threat is the fact when the bank becomes lower rated the chance of being acquired raises. In the next section we define our variables in order to start our methodology and make before testing what we have to expect as reaction on the ratings given by Fitch. Download 330.77 Kb. Share with your friends:
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