DBRS Morningstar Publishes Final Global Methodology for Rating Banks and Banking Organisations

DBRS Morningstar has finalised the “Global Methodology for Rating Banks and Banking Organisations” (the Methodology). This supersedes the version published on 8 June 2020 and is effective as of 19 July 2021. This Methodology presents the criteria for which bank ratings are assigned and monitored.

DBRS Morningstar has made material updates to the Methodology as outlined in the request for comment (RFC) on 9 June 2021, with the principle change to the framework for assigning a bank’s Intrinsic Assessment (IA). The changes increase the transparency of the rating process for users of the Methodology, particularly with respect to the quantitative analysis underlying the IA.

The updated Methodology separates the quantitative and qualitative elements of a bank’s fundamental creditworthiness through a separate Scorecard (quantitative) and Grids (qualitative), which are subsequently combined. The output of the 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 informs the rating committee process.

Although the changes to the Methodology are material, they are not expected to lead to many, if any, changes to existing ratings as the underlying analytical approach remains essentially unchanged. Most banks’ current IAs fall within the three-notch IAR generated by the new Methodology and, consequently, their ratings are unaffected by the Methodology. A small number of banks’ IAs fall outside the IAR and, for these banks, the new 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 weigh heavily on overall creditworthiness, leading to an IA that is lower than the IAR.

Consistent with increased transparency, DBRS Morningstar intends to publish the detailed Scorecards and Grids of publicly rated banks during September 2021 and will, at the same time, communicate any rating impact or rationale for banks with an IA positioned outside the IAR.

All comments received during the RFC period have been published to the DBRS Morningstar website, 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].