Rating agencies cause irritation

11 July 1997

Letter to the Editor

From Jinx Grafftey-Smith, National Commercial Bank

Sir, during the recent International Arab Banking Summit, your question regarding the rating agencies was unsatisfactorily answered by the panel concerned: indeed, it was treated with scant respect. For those who were not present, I will repeat what you said:

'What are Arab banks going to do collectively or individually about the fact that Moody's Investors Service is making a business out of consistently, deliberately and erroneously under-rating the economies of the Arab world and, consequently, the financial institutions of the Arab world?'

At a later stage in the conference, a representative from one of the rating agencies addressed a workshop on the subject of the motivation and implications of rating Arab economies and banks. It was an extraordinarily anodyne performance and reflected all too closely that philosophy so prevalent among certain rating agencies: namely, that it is not only their inalienable right but their actual duty to rate whomsoever they will - whether solicited or unsolicited.

It is the 'duty' aspect that I find so hypocritical. After all, Standard & Poor's and Moody's are both in the business to make a profit and the rating game is in a very real sense self-perpetuating. The original motivation of the rating agency is often expressed with reference to 'out subscribers' needs/wishes/requests etc.' when we all know that as often as not, the rating agency itself acts pro- actively in encouraging its subscribers to look at new fields. Saudi Arabia, for example, is not an international borrower; there is no bank or corporate debt to be rated; and the Saudi banks are not lenders to the money markets. But of course, if a subscriber is asked by the rating agency whether he would like to see ratings on the Saudi banks (and if so please tick this box), the subscriber is almost bound to respond affirmatively. What sort of justification is this for taking on new markets? It is certainly the given one; although those of us who have worked in or with Saudi banks for many years have never been aware of such a requirement. Indeed, in the case of NCB, the bank did not produce any financial accounts for almost three years and very few of our several hundred counterparties took a blind bit of notice! Today, with the largest paid-up capital of any Arab bank ($2 billion), a solvency ratio well in excess of 20 per cent, and a five-year average increase in profits of some 18 per cent to the end of 1996, is it any wonder that the bank is mildly irritated by the recent (entirely unsolicited) ratings from two of the main agencies - one showing the lowest investment grade (equivalent to the sovereign risk they have accorded to the kingdom) and the other showing a sub-investment grade! Unbelievable, and 'all because our subscribers requested it'!

In my view, some rating agencies use a deft mixture of blandishment and blackmail in the knowledge that once a new market interest has been created, their subscribers are virtually compelled to carry on watching the comparative tables, however absurd these may seem to experienced bankers. Someone referred to one agency taking 'the high moral ground' when speaking of their so-called 'duty'. In my view, they are probably standing in dead ground, with a pretty restricted field of vision.

No-one denies the value of rating agencies. At NCB, we are enthusiastic users of their services. But, it seems to me that different countries may require different approaches, and there is no doubt that neither of the big two agencies has got their approach to Saudi Arabia anything like right - and they know it. Arrogance, omniscience and an infallible self- belief are hardly welcome to the Saudi authorities.

I suspect it will be a long time before they become welcome visitors to the kingdom. And meanwhile, they will continue to make mistakes of fact and judgement because they have no access to the banks they are rating.

Perhaps until they do have such access, they should just fold their tents.

Jinx Grafftey-Smith

London Representative

National Commercial Bank

78 Cornhill

London EC3V 3QQ

Moody's on 26 June announced an improved outlook for Saudi Arabia's sovereign ceilings (see Saudi Arabia).

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