Tuesday, September 04, 2007

Is reliance on good ratings a blind leap of faith?


The Bank of East Asia, the fifth-largest domestically incorporated bank in Hong Kong has its ratings of 'A-' long-term and 'A-2' short-term credit ratings affirmed by Standard & Poor's Ratings Services. It also received a ‘B’ on fundamental strength rating.

“The ratings on BEA reflect the bank's solid domestic franchise in Hong Kong and its rapid but careful expansion in China and reflect the bank's improved asset quality, satisfactory liquidity, and sound capitalization. Moderating factors include growing latent credit risks and pressured profitability." said Standard & Poor's credit analyst Qiang Liao.

Though BEA is small relative to the dominant banks in the system but it has been the precursor in terms of diversifying business into overseas market, with Hong Kong only accounting for only 62.6 percent of its total advances as of end of June 2007. After incorporating a wholly owned subsidiary in mainland China in April 2007, its loans from the Chinese market grew from 22.9 percent up from 14.4% in 2005.

A favourable combination of economic conditions, rising property prices in Hong Kong and prudent risk management measures further enhances BEA’s asset quality and keep its impaired loan ratio to 0.79% at the end of June 2007.

Ratings have become a standardised way in which we view an organization, and needless to say one with highest five-star ratings will win confidence.

Yet lawmakers and investors in the U.S have criticised the credit rating company, Standard & Poor’s for failing to judge the risks of securities backed by subprime mortgages. The ratings for Basis Capital tumbled from distinction to ‘on hold’ only on July 17, after massive loss up to 50 percent on the dollar was lost.

In the light of funds filing for bankruptcy protections and Standard & Poor’s President Kathleen Corbet resigning as a result (allegedly), what good is a good rating?