Pakistan Credit Pakistan Credit Securities and Exchange Securities and Exchange Rating Agency Commission of Pakistan Tuesday, September 6, 2011 1
Regulators… IN ACTION Regulators… IN ACTION CRAs, …… , play a critical “gatekeeper” role in the debt market…because of ( their ) systemic importance and the reliance placed on ( their ratings ), ….the l l d ( h ) h activities and performance of CRAs … , are matters of national public interest , as CRAs are central to capital formation, p investor confidence, and the efficient performance…of the…economy” US Congress ( Dodd ‐ Frank Wall Street Reform and Consumer Protection Act, January 5, 2010 ) 2
A New Paradigm… Integrity Skill Set Clean Bill of Health Good….BUT Needs to be …But need improvement Better…. Dodd Frank Dodd Frank Act DRIVEN A ccountability Enhanced Focus on Focus on Regulatory transparency Oversight A NEW PARADIGM….in the making Regulatory Oversight CRA Initiatives CRA Business Model CRA Business Model Separation of ratings from non ‐ rating advisory functions Separation of ratings from non rating advisory functions • • Separation of business solicitation and execution • Governance Structure Independent directors of the board • Quality of Rating Process Q lit f R ti P A Annual criteria review l it i i • Training of credit analysts • Exception recommended where CRA’s size is small 3 •
Region – An Overview Soveraign Ratings [S&P] BBB BBB BBB- BBB- India BB+ BB+ BB BB BB BB BB- BB- Bangladesh B+ B+ B B B- B- Pakistan P ki t CCC CCC 2006 2007 2008 2009 2010 Region – NUMBERS SPEAK Numbers N b 2010 2010 – 2008 2008 2000 2000 – 2007 2007 USA GDP Growth (Average) 0.4% ~ 3.5% GDP Growth (Average) 3.0% 5.5% Pakistan NPLs (2010) 14.0 % 7.0 % GDP Growth (%) 8.0% 7.0% India NPLs (%) 2.7 % 7.0 % GDP Growth (%) 6.0% 5.5% Bangladesh NPLs (%) 7.9 % > 15 % 4
India – A Proactive regulatory regime for CRAs CRAs ROBUST ECONOMY ‐ RATINGS STILL have to face the test of economic distress….. • Significant penetration (CRISIL from less than 1,000 to above 11,000 ratings) • An MoF ‐ led commission (Dr. K.P. Krishnan Report ‐ Dec 21’09) comprising all stakeholders • ( SEBI, RBI, Industry bodies ) sat & deliberated Upon the CRAs….. KEY Commission Findings – CLEAN BILL OF HEALTH FOR INDIAN CRAs Area under focus Area under focus Recommendation Recommendation Regulatory Oversight SEBI (to be the lead regulator) + Standing Committee (having other regulators as members) Transparency Transparency Disclosure of Fee in greater detail Disclosure of Fee in greater detail Conflict of Interest Separation of ratings from other CRA businesses Quality of Rating Process Process & Compliance audits (bi ‐ annual) Compliance with IOSCO trast…. India – CRA regulations in US US – CRA regulations in 2007 CRA regulations in 2007 In Cont place in 1999 – Updated 2010 EU – still in process 5
Bangladesh – Emphasis on high ‐ quality legislation li l i l i • The Youngest in the The Youngest in the • Limited penetration of Limited penetration of Regional Ratings Industry Ratings…Expected to grow rapidly • Comprehensive • Enhanced regulations & CRA Ratings Disclosures undertakings Mandatory for Ratings regulatory purposes ALL IPOs Unrated Robust Regulatory Exposure issued @ Framework penalized premium All Asset Backed • Regulator driven • Regulatory • Unrated RW” (SECB + BB) Curbs on Rating Securities (ABS) 125% business volumes Shopping All Financial • Institutions ( in Institutions ( in case of an IPO ) 6
Pakistan – The CRA Default Experience Pakistan The CRA Default Experience WHAT made CRA Ratings Falter Poor Economy • CRA – Fall in Credit Quality CRA F ll i C di Q li Real GDP 2008 – 2004 – Growth 2011 2007 CRAs 2011 2010 2009 2008 & TOTAL Before (%) < 2.5% 7.25% PACRA & PACRA & 8 6 1 2 17 Pakistan Economic Survey JCR ‐ VIS Stock Market Crash & Closure • Liquidity crunch in money market i idi h i k • Crumbling Law & Order • 7
PACRA - SNAPSHOT First & Largest Credit Rating Agency of Pakistan First & Largest Credit Rating Agency of Pakistan � Established in 1994 as JV between IFC, Fitch Ratings and Lahore Stock Exchange. � � Ab Above 1050 rating opinions since inception. 1050 ti i i i i ti � Technical partner for NCR-Bangladesh (National Credit Ratings Limited). � Founding member of ACRAA (Association of Credit Rating Agencies in Asia). g ( g g ) � Drafted NBFI’s regulatory and framework for Bangladesh – World Bank assessment � Participate actively in finance related forums – Staff College, LUMS etc. � International Rating for Fitch. � Market share 54% with over 60% share of Corporate and Debt Instruments. P Products d t PACRA PACRA JCR JCR T t l Total Financial Institutions 65 91 156 Corporates 44 29 73 Mutual Funds 62 47 109 � Ratings penetration: Low Ratings penetration: Low Debt Instruments Debt Instruments 61 61 30 30 91 91 � Corporates: Very Low Total 232 197 429 8 * Note the small size. FIR # 58 not included.
Creditability 1. Organizational Structure Managing Director RC (5 members) 2 Rating Teams R & D Criteria Business Management 2. 2. Staffing Staffing Core Team Composition and Expertise Accountants 10 MBA/MSc 11 BScs 5 Quants Policy Development 2 CFAs 3 dedicated members • • 4 Level-III candidates Multiple policies developed • • 4 Level-II candidates • Banking Exposure • + 50 years cumulative experience Credi t, Risk, CFO, Ops • • 2 professional bankers 3. Pecuniary Matters Entity Profitability Loan Size Asset Size Fees Category Small <200 <2,000 <4,000 350 ‐ 400,000 Medium <500 <5,000 >10,000 400 ‐ 450,000 Large <1,000 <10,000 <20,000 400 ‐ 600,000 Extra Large >1,000 >10,000 >20,000 600 ‐ 750,000 9 Profitability, Loan size and Asset Size are in PKR mln and fees is in PKR only
Creditability Cont. 4. Rating Process PROCESS Well populated RC Analytical Team independent of RC Independent Criteria & Research Enhanced documentation Rating Programs Internal Code of Conduct Compliance Audits Compliance Audits 10
Creditability Cont. WHAT WE LOOK AT WHILE EVALUATING A CORPORATE RATING PACRA arrives at its ratings by evaluating the following factors: 1. Ownership & Governance - Owners credit history –business acumen & financial strength. Governance structure –distinction in roles - board oversight - processes to avoid conflict of interest. Transparency and accountability measures. 2. Sponsor Support - Sponsors commitment is studied and classified as Core Strategic or Non 2 Sponsor Support Sponsors commitment is studied and classified as “Core” Strategic” or “Non Strategic Investment”. Here we look at the sponsors ability & willingness to provide support in times of crisis. 3. Management Quality - Here we study the organizational structure, quality of management, its stability, delegation of responsibility and management’s accountability mechanism. bili d l i f ibili d ’ bili h i 4. Systems and Controls - It is constituent of policies & procedures, control mechanism, MIS (Reporting), technology infrastructure. A clue is taken to their appropriateness and effectiveness. 5. Business Risk- Starting with factors such as current economy, sector performance, entity positioning, diversification are studied. Then companies’ own strategy of performance is analyzed. 6 Financial Risk 6. Financial Risk - Detailed analysis of company capital structure and cash flows is Detailed analysis of company capital structure and cash flows is undertaken. 11
Conflict of Interest Share holder No interference in the company’s affairs Board Board Board – Independent 6 (o/o 7) Board Independent 6 (o/o 7) Rating Committee RC – Independent No shareholder/BoD representation No reporting to BoD Well Populated RC Well Populated RC • 3 Apex members [ 2 independent of rating execution process, while 1 is in transition] • Heads of Rating Teams (2) • Analyst/s • Heads of criteria and R & D d f i i d (on invitation) Standard Fee Structure Transparent – in Public domain Single Business Company Single Business Company 12
Rating Shopping – Not prevalent Rating Shopping Not prevalent PACRA to JCR JCR to PACRA Year Total Switch Entity Rating Action Entity Rating Action National National Downgrade Downgrade ‐ Investment Downgrade Escort Short Term Trust (1Notch) Investment Bank (1Notch) FY2011 2 Upgrade Upgrade IGI Funds IGI Funds (2Notches) (2Notches) Asia Insurance Asia Insurance (1Notch) (1Notch) National House Building Fullerton Asset Finance Corp Maintain Mgnt Maintain FY2010 3 JS Investments Downgrade (AMC) (1Notch) ‐ ‐ Dual Ratings ‐ Current ( No difference in rating opinion between two agencies) 1 Faysal Bank Limited Al ‐ Baraka Upgrade Islamic Bank (1Notch) ‐ ‐ 2 The Bank of Khyber y FY2009 FY2009 2 2 3 Askari General Insurance Company Limited 4 New Jubilee Insurance Company Limited Upgrade 5 East West Insurance Company Limited KASB Funds (2 Notches) ‐ ‐ 6 Pakistan Kuwait Investment Company (Pvt.) Ltd. 7 Al Baraka Bank (Pakistan) Limited 8 Tameer Microfinance Bank 13
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