DBRS Morningstar Requests Comments on Proposed Updated Global Methodology for Rating Banks and Banking Organisations

DBRS Morningstar is requesting comments on the proposed updates to the “Global Methodology for Rating Banks and Banking Organisations” (the Methodology), which may supersede the version published on 8 June 2020. This methodology presents the criteria for which bank ratings are assigned and/or monitored.

DBRS Morningstar is proposing material updates to the Methodology, and the principle change is to the framework for assigning a bank’s Intrinsic Assessment (IA). The main purpose of the changes is to increase the transparency of the rating process for users of the Methodology, particularly with respect to the quantitative analysis underlying the IA.

The proposed updates separate the quantitative and qualitative elements of a bank’s fundamental creditworthiness through a separate Scorecard (quantitative) and Grids (qualitative), which are subsequently combined. The current methodology combines both qualitative and quantitative elements upfront through Methodology Grids and a separate scorecard that is used for reference purposes only. The output of the new Scorecard (which generally uses five years of historical data with a greater weight on recent years) and Grids (which include qualitative and forward-looking analysis) is equally weighted and combines to generate a three-notch Intrinsic Assessment Range (IAR), which guides the rating committee process.

Although the changes to the Methodology are material, they are not expected to lead to many, if any, changes to ratings as the underlying analytical approach remains essentially unchanged. Most banks’ IAs fall within the three-notch IAR generated by the proposed Methodology and, consequently, their ratings will be unaffected by the proposed Methodology. A small number of banks’ IAs fall outside the IAR and, for these banks, the proposed Methodology points to an IA that is potentially higher than the current IA. This is generally the result of idiosyncratic factors (e.g., a bank might report relatively strong financial data that is reflected in its Scorecard, but the bank’s business model has specific weaknesses and, although reflected in the Grids, these weaknesses still weigh heavily on overall creditworthiness, leading to an IA that is lower than the IAR. DBRS Morningstar will place any bank with an IA outside the IAR under observation and will communicate any rating impact when the Methodology is finalised.

Comments should be received on or before 9 July 2021. Please submit your comments to the following email address: [email protected].

DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

Notes:
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

For more information on this methodology or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].