Credit Rating Strategies: A Study of GCC Banks

Y Sree Rama Murthy,Saeed Al-Muharrami

doi:10.1177/2158244020982290

Abstract

Identifying financial strategies, which help a bank to survive a crisis, is the main purpose of the article. Low oil prices and the COVID-19 pandemic is the latest crisis being faced by the Gulf Cooperation Council (GCC) banks. This article examines the financial strategies of those banks that managed to retain good credit ratings both before and after the global financial crisis, so as to throw light on the characteristics of banks that managed to remain steady and stable. This article analyzes the Fitch credit ratings of 51 Islamic and conventional banks, operating in the GCC, divided into pre–global financial crisis (2002–2007) and post–global financial crisis (2008–2013) periods. Trend and behavior of average ratios of top-rated banks in both the periods is first attempted before moving to the “Ordered Choice Logit” regression method to further analyze the data. Regression results indicate that size and cost management are very important factors in ratings both before and after the financial crisis. As long as asset quality is under control, liquidity is the focal point in achieving good ratings. Top-rated Islamic banks seem to be following a strategy of allowing capital ratios to trend down during a crisis as long as capital is well above the regulatory requirements. The article is the first of its kind, which examines credit rating strategies of GCC Islamic banks and conventional banks. The findings of the article are useful for banks as they throw light on appropriate strategies to be adopted by banks during crises.

Highlights

The net profits of banks in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are under pressure due to low oil prices and the COVID-19 pandemic
It recommends the internal financial strategies that bank managements should follow to ensure that the credit rating of a bank is not affected by a crisis that may be due to domestic factors, such as low oil prices, or global factors, such as the COVID-19 pandemic
Ratios of the banks (Table 3), which remained in the top quartile, tell us that, to be top ranked, a bank should maintain a high total capital ratio

Summary

Introduction

The net profits of banks in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are under pressure due to low oil prices and the COVID-19 pandemic. Pressures facing the banks in the GCC region are both domestic and global. The article hopes to find answers by looking at the 2008 global financial crisis (GFC), and how it has affected the credit rating and ranking of GCC conventional and Islamic banks. The article throws light on the characteristics of the top-ranking banks both before and after the financial crises. It recommends the internal financial strategies that bank managements should follow to ensure that the credit rating of a bank is not affected by a crisis that may be due to domestic factors, such as low oil prices, or global factors, such as the COVID-19 pandemic

Objectives

Results

Conclusion