Sovereign And Country Risk What They Mean For Financial Institutions Ivelina Stanoeva Director 6 April 2016 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public. Copyright 2016 by S&P Global Market Intelligence. All rights reserved.
Distribution Of Sovereign Ratings Source: S&P Global Market Intelligence Sovereign Credit Risk Analysis Template, report creation date 30 March 2016. 2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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., banks and industrial corporations within the country, etc.) Systemic Risks For: Banks Insurance Industrials 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 3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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) Example: Change in Sovereign Local Currency Rating Example: Change in Transfer & Convertibility Assessment Change In Sovereign FC Rating - South Africa Source: S&P Global Market Intelligence, RatingsDirect on S&P Capital IQ Platform. Local & Foreign Currency Table created on 21 March 2016. Potential change in Foreign Currency Ratings of all entities in the country Change In Bank Rating - FirstRand Bank Ltd. Before: BBB Before: BBB 13/06/2014 BBB- 18/06/2014 BBB- Potential change in Local & Foreign Currency Ratings of government related entities, systemic privately-owned banks and entities rated above the Sovereign Change In Sovereign LC Rating - South Africa Entities rated above the Sovereign Change In Bank Rating - Standard Bank of South Africa Ltd. Before: A Before: BBB+ 12/10/2012 A- 16/10/2012 BBB 4 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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, longterm investment decisions, and payment capacity of an entity. 5 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
Incongruity Between Country Risk And Sovereign Risk Sovereign rating: AA- Country Risk Score: bb+ Sovereign rating: BB+ Country Risk Score: bbb+ Source: Sovereign Ratings come from RatingsDirect on S&P Capital IQ Platform. Country Risk Scores derived by S&P Global Market Intelligence, February 2016 - provided for illustrative purposes only. 1 to 20 represent AAA/aaa to SD/sd. 6 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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 7 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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 Operating Environment Assessment (BICRA). 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. *Stand-Alone Credit Profile. 8 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
Sovereign Risk Indirect Impact On Banks Sovereign risk change = BICRA change? Date Sovereign FC Rating Date BICRA Group Economic Risk Score Industry Risk Score Anchor Before: BBB+ Before: 4 5 3 bbb Oct- 12 BBB Aug-12 4 5 3 bbb Oct 2012 to Jun 2014 BBB Jul-13 4 5 3 bbb Jun-14 BBB- Nov-14 5 6 4 bbb- At present BBB- Dec-15 5 6 4 bbb- Sovereign risk indirect impact for banks: BICRA Economic Risk Score Industry Risk Score ANCHOR +2 Business Position - 5 BANK-SPECIFIC FACTORS +2 Capital and Earnings - 5 +2 Risk Position - 5 +1 Funding and Liquidity - 5 STAND ALONE Source: Standard & Poor s Ratings Services Corporate Methodology, Nov. 19, 2013, and Banks: Rating Methodology And Assumptions, Nov. 9, 2011. 9 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
Sovereign And Country Risk Impact On Banks Africa: Source: S&P Global Market Intelligence, RatingsDirect on S&P Capital IQ Platform: Foreign Currency Sovereign ratings as of 29 Feb 2016, Bank ratings: 30 March 2016, Bank Anchors: 23 March 2016. Lowercase nomenclature is used to differentiate the Anchor Assessment from the ratings issued by Standard & Poor s Ratings Services. 10 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
Sovereign And Country Risk Impact On Banks Distribution: Egypt, Kenya, Morocco, Nigeria, South Africa and Tunisia Country S&P FC Sovereign Rating S&P Bank Anchor S&P Bank Rating Median S&P Global Market Intelligence CreditModel FI Score Median Source: S&P Global Market Inttelligence, RatingsDirect on S&P Capital IQ Platform: Foreign Currency Sovereign ratings as of 29 Feb 2016, Bank ratings: 30 March 2016, Bank Anchors: 23 March 2016. Lowercase nomenclature is used to differentiate the Anchor Assessment from the ratings issued by Standard & Poor s Ratings Services. Source: S&P Global Market Intelligence CreditModel Financial Institutions, report created 30 March 2016 11 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public. S&P Global Market Intelligence Country Risk Score Egypt B- b B- b- b Kenya B+ b+ B+ b+ b Nigeria B+ b+ B+ b+ b Morocco BBB- bb N/A bb- bb+ South Africa BBB- bbb- BBB- bbb- bbb- Tunisia N/A b+ B b+ b+
Sovereign And Country Risk Impact On Banks Positive: Support for government related entities Support for privately-owned banks Indirect support (systemic support e.g. through regulation) Negative: Government interference (e.g. directed lending) Sovereign downgrades (entities rated above the Sovereign) Indirect impact (e.g., weaker institutions) South Africa: A closer Look South Africa Corporates South Africa Financial Institutions 2 nd quarter 2015 1 st quarter 2015 4 th quarter 2014 3 rd quarter 2014 2 nd quarter 2014 1 st quarter 2014 Stable 91.0% 91.0% 100.0% 90.0% 70.0% 100.0% Downgrades 0.0% 9.0% 0.0% 10.0% 30.0% 0.0% Upgrades 9.0% 0.0% 0.0% 0.0% 0.0% 0.0% Stable 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Downgrades 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Upgrades 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Source: S&P Global Market Intelligence, CreditPro, Corporates and Financial Institutions Ratings, 1 quarter horizons, data refresh date March 2016, report creation date 21 March 2016. 12 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
Conclusion Sovereign risk differs from Country risk Sovereign risk can have an indirect impact on sub-sovereign entities through its relation to country and industry risk Pressure at the Sovereign level has both direct and indirect impact on financial institutions, banks in particular 13 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Global Market Intelligence. Not for distribution to the public.
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