The Country Risk And Sovereign Risk Conundrum

Transcription

1 The Country Risk And Sovereign Risk Conundrum Michael Bolle Vice President, S&P Credit Solutions Head of Market Development EMEA 8 October 2015 Ivelina Stanoeva Director, Analytical Solutions & Services S&P Capital IQ Paolo Spadotto Risk Specialist, Analytical Solutions & Services S&P Capital IQ Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. Copyright 2015 by Standard & Poor s Financial Services LLC (S&P). All rights reserved.

2 Overview Of S&P Capital IQ S&P Capital IQ is a key contributor to the growth, transparency, liquidity, innovation and value creation in the global capital markets. We are a leading provider of multiasset class and real-time data, research and analytics to institutional investors, investment and commercial banks, investment advisors and wealth managers, corporations, public institutions and universities worldwide. Our broad suite of capabilities are designed to help track performance, generate alpha, identify new trading and investment ideas, and undertake risk analysis and mitigation strategies. Through leading desktop solutions, enterprise solutions and research offerings, S&P Capital IQ sharpens financial intelligence into the wisdom investors need. 2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

3 Today s Speakers Ivelina Stanoeva Director, Analytical Solutions & Services S&P Capital IQ Paolo Spadotto Risk Specialist, Analytical Solutions & Services S&P Capital IQ Michael Bolle Vice President, S&P Credit Solutions Head of Market Development EMEA S&P Capital IQ 3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

4 Recent Trends In Sovereign Rating Changes Source: S&P Capital IQ, CreditPro, Sovereign Foreign Currency Ratings, 1 year horizons, data refresh date January 2015, report creation date 16 September Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

5 Sovereign Risk By virtue of its sovereignty, a central government can cause multiple Direct and Indirect risks to all other parties operating within its influence (e.g., corporations and banks within the country, etc.) Systemic Risks for: Corporates Banks Insurance Transfer & Convertibility Risk Sovereign Risk Foreign Currency Default Risk Government Related Entities, Systemic Privately Owned Banks & Entities Rated above the Sovereign Local Currency Default Risk 5 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

6 Sovereign Risk Direct Impact A change in a Sovereign s credit quality may lead to a straightforward parallel change in an entity s credit quality Change in Sovereign Foreign Currency Rating (countries not part of a monetary union) Change in Transfer & Convertibility Assessment Potential change in Foreign Currency ratings of all entities in the country Change in Sovereign Local Currency Rating Potential change in Local & Foreign Currency Ratings of Government Related Entities, Systemic privately owned banks and entities rated above the Sovereign Examples: Change in Sovereign Rating Change in Company's Ratings Oman Telecommunications Co before: A before: BBB+ 09/02/2015 A- 12/02/2015 BBB Hellenic Telecommunications Organization S.A before: B before: BB 06/02/2015 B- 16/02/2015 BB- Source: S&P Capital IQ, Ratings Direct on Capital IQ platform. Local & Foreign Currency Table created on 14 September Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

7 Sovereign Risk Indirect Impact Changes in sovereign risk may have an impact on the assessment of systemic risk (country and industry) risk of an entity: Banking Industry Country Risk Assessment (BICRA) financial institutions Insurance Industry Country Risk Assessment (IICRA) insurance companies Corporate Industry Country Risk Assessment (CICRA) corporations Country risk the risk of doing business in a country: Covers the downside of a country s business environment including economic, political and institutional environment as well as financial markets that can affect day-to-day operations, long-term investment decisions, and payment capacity of an entity. 7 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

8 Sovereign Risk Indirect Impact Sovereign and Country Risk Drivers Sovereign Risk Drivers Institutional effectiveness Economic structure and growth prospects External liquidity and international investment position; Fiscal flexibility and fiscal performance, combined with debt burden; Monetary flexibility. 60% Country Risk Drivers Institutional effectiveness; Economic structure and growth prospects; Financial system risk; Payment culture and ruleof-law risk. 40% 4 x 25% Source: S&P Capital IQ, Sovereign PD Scorecard v.2014 based on Standard & Poor s Ratings Services Sovereign Rating Methodology, 23 Dec 2014; S&P Capital IQ Country Risk Assessment Scorecard based on Standard & Poor s Ratings Services Country Risk Assessment Methodology & Assumptions 19 Nov Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

9 Country Risk Score Incongruity Between Country Risk And Sovereign Risk Angola Sovereign rating: AA- Country Risk Score: bb+ China Kuwait Trinidad and Tobago Oman Azerbaijan Russia Kazakhstan Philippines Iceland Spain Portugal Cyprus Greece Sovereign rating: B+ Country Risk Score: bb+ 6 Ireland Malta Sovereign Rating Source: Sovereign Ratings come from Ratings Direct on S&P Capital IQ platform. Country Risk Scores derived by S&P Capital IQ, September provided for illustrative purposes only. 1 to 20 represent AAA/aaa to SD/sd. 9 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

10 Sovereign Risk Indirect Impact Trends in Sovereign, Financial Institutions, and Corporates Jan 2014 June 2015 Italy a closer look Source: S&P Capital IQ, CreditPro, Corporates and Financial Institutions Ratings, 1 quarter horizons, data refresh date September 2015, report creation date 22 September Sovereign Foreign Currency Ratings, 1 quarter horizons, data refresh date January 2015, report creation date 21 September Sovereign Ratings changes for 2015 come from Ratings Direct on S&P Capital IQ platform. 10 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

11 Sovereign Risk Indirect Impact The Indirect impact of Sovereign risk on the Stand-Alone Credit Profile Changes in Sovereign risk may have an impact on the assessment of systemic risk (i.e. Country & Industry) risk of an entity - Banking Industry Country Risk Assessment (BICRA) Financial institutions - Insurance Industry Country Risk Assessment (IICRA) Insurance companies - Corporate Industry Country Risk Assessment (CICRA) Corporations Highest indirect impact Government related entities Banks Insurance companies Commercial and industrial entities Lowest indirect impact 11 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

12 CICRA ANCHOR STAND ALONE Sovereign Risk Indirect Impact Sovereign risk indirect impact for banks: BICRA Economic Risk Score Industry Risk Score +2 Business Position - 5 BANK-SPECIFIC FACTORS +2 Capital and Earnings Risk Position Funding and Liquidity - 5 Sovereign risk indirect impact for corporates: Country Risk Industry Risk Competitive Position Cash Flow / Leverage Business Risk Financial Risk Anchor Modifiers Stand-Alone Credit Profile Source: S&P Ratings Services Corporate Methodology, Nov. 19, 2013, and Banks: Rating Methodology And Assumptions, Nov. 9, Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

13 Anchor SACP Final Rating Sovereign Risk Indirect Impact On Corporations Example: Enagas S.A. in Spain via S&P Capital IQ s Credit Assessment Scorecard Regulated Utilities Company Name Enagas Group Enagas Analyst N/A Country of Domicile Spain Sub-Industry Gas utilities Date of Analysis N/A Sovereign FC Rating BBB Competitive Position Group National Industries & Utilities CICRA Competitive Position 2.0 Business Risk Profile Excellent Modifiers Diversification/ Portfolio Effect a- 3.7 Strong Capital Structure 0 Financial Policy 0 0 a- Group or Government Support Rating above the sovereign bbb+ Cash Flow/ Leverage Assessment 6.1 Financial Risk Profile Significant Liquidity Management and Governance Source: S&P Capital IQ, Regulated Utilities Scorecard Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

14 Sovereign Risk Indirect Impact On Corporations Operations in more than one country Hellenic Telecommunications Organization S.A. Titan Cement Co. S.A. Source: S&P Capital IQ, Diversified Telecommunication Services and Construction Materials & Building Products Scorecards Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

15 Sovereign risk Indirect impact on Banks A change in Sovereign risk levels will affect the SACP of a bank through the potential change in the BICRA assessment. The BICRA is based on two scores : Economic Risk (ER) captures the economic resilience and economic imbalances in the country as well as the level of credit risk in the economy. It is akin to country risk and thus is affected by changes in Sovereign risk; Industry Risk (IR) captures the existing institutional framework, the industry competitive dynamics and the system wide funding. It can be affected by changes in Sovereign risk too (system support). Sovereign Risk Drivers Institutional effectiveness; Economic structure and growth prospects; External liquidity and international investment position; Fiscal flexibility and fiscal performance, combined with debt burden; Monetary flexibility. BICRA Drivers Economic resilience; Economic imbalances; Credit risk in the economy; Institutional framework; Competitive dynamics; System-wide funding. 15 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

16 Sovereign Risk Impact On Banks Summary Positive: - Support for Government Related Entities - Support for Privately-Owned Banks - Indirect support (systemic support) Negative: - Government interference (e.g. directed lending) - Sovereign downgrades (entities rated above the Sovereign) 16 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

17 Sovereign Risk Privately Owned Banks Source: Standard & Poor s Ratings Services Bank Methodology: Rating Methodology And Assumptions, Nov. 9, Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

18 Sovereign Risk Privately Owned Banks Recent trends The supportiveness classification for privately owned banks of a number Sovereigns has changed since the beginning of 2015: - Lack of capacity to support systemically important financial institutions Support now uncertain for Greece - Change in regulation Implementation of the Bank Recovery and Resolution Directive by Austria, Germany, UK and Denmark. Support now uncertain Further changes are expected after the implementation of the Directive by other European Countries (January 2016) 18 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

19 Conclusion Sovereign risk differs from Country risk Sovereign risk can have a direct impact on entities Sovereign risk can have an indirect impact on entities through its relation to country & industry risk (for regulated entities) Banks are more sensitive to Sovereign risk a complex blend of direct and indirect influence 19 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

20 Contact Details If you have any questions for our speakers or would like more information about S&P Capital IQ solutions, please contact us. Ivelina Stanoeva, Director, S&P Capital IQ Global Credit Services Paolo Spadotto, Risk Specialist, S&P Capital IQ Global Credit Services General Enquiries 20 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public.

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