BRIC banks reap ratings reward from government support

April 29, 2013

The ability of Brazil, Russia, India and China to support their leading banks is tightly correlated to the credit rating on the banks, according to ratings agency Moody’s. The agency compares the ratings of four of the biggest BRIC banks which it says are likely to enjoy sovereign support if they run into trouble.

China’s Industrial & Commercial Bank of China (ICBC) tops the list of BRIC lenders with a rating of (A1 stable)  thanks to the central bank’s $3 trillion plus reserve stash.

Brazil’s Banco do Brazil  (Baa2 positive) is in investment grade territory but it still fares better than the State Bank of India (SBI) (Baa3 stable) and Russia’s Sberbank (Baa3 stable) at one notch above junk status.

That gels broadly with credit ratings for the underlying sovereigns — Brazil for instance is rated Baa2 while India has a Baa3 rating (it is in danger of losing its investment grade rating however). Russia’s sovereign rating though at Baa1 is two notches higher than Sberbank’s Baa3.

The Moody’s report found that all of the four banks had seen creditworthiness improve in recent years. But those in Brazil and China benefited from the stable domestic environments while SBI and Sberbank ratings were constrained by the more challenging operating conditions in India and Russia.

In a self-perpetuating cycle, ratings will be higher because governments are prepared to provide high levels of support to the banks, reflecting the lenders’ systemic importance and in some cases government ownership.

Credit default swaps (CDS), the cost of insuring debt on all four banks show a correlated fall from 2008’s peak with sovereign debt CDS (see graphic below)



Moody’s said:

Top BRIC banks’ deposit ratings  are very closely aligned to their governments’ debt ratings, because Moody’s considers that BRIC governments will provide very high systemic support to these banks, reflecting these banks’ very high systemic importance and government ownership.

Moody’s expects that the deposit ratings of large BRIC banks will remain closely correlated with their government debt ratings.

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