Credit ratings play a key role in today's financial system serving as independent evaluations of the creditworthiness of individuals and institutions. Credit ratings given to banks by rating agencies provide information to individuals and investors and play an important role in helping them determine whether financial institutions will be able to meet their debt obligations and other financial commitments.
Globally, the three big ratings agencies are Moody's, Standard & Poor's and Fitch Ratings while PACRA and JCR-VIS are the two rating agencies present in Pakistan. According to their websites, PACRA was founded in 1994 as a joint venture between Fitch Ratings, IFC and the Lahore Stock Exchange and JCR-VIS was a joint venture agreement between the Japan Credit Rating Agency (JCR), Vital Information Services (VIS) and the stock exchanges of Karachi and Islamabad.
Why they matter
When ratings agencies give ratings, they analyse financial statements (such as balance sheets, P&L statements, cash flow statements etc) of banks and other financial institutions so as to allow investors, depositors and governments to make judgements as to their stability. Ratings can be assigned separately to long-term and short-term obligations. Long-term ratings analyze and assess a company's ability to meet all of its responsibilities whereas short-term ratings focus on specific issues and their ability to perform given the issuer's current financial condition and the overall market performance.
Investors utilise the information from either a single agency or from multiple rating agencies with the expectation that the credit rating agencies will provide objective information based on sound analytical methods and accurate statistical measurements.
The top notch rating that a financial institution can get is AAA and the higher the rating is, the safer the bank is thought to be on its financial obligations. As ratings improve, the interest rate that banks pays on their long-term debt decreases. Since banks obtain their funding from a variety of sources including long-term bonds, a higher rating makes this source of capital cheaper. As a leveraged financial institution, the ability of banks to access cheap funds is key.
In recent news, JS Bank's Long-Term Rating has been upgraded by PACRA from A+ (A Plus) to AA- (AA Minus).-PR