> For the complete documentation index, see [llms.txt](https://docs.praa.ms/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.praa.ms/risk-factors/default-risk.md). # Default risk This section provides information on the asset’s relative ranking regarding critical financial metrics and ratios measuring credit risk and the probability of default. InvestWatch considers the business size, industry position, growth rate and stability of its key financials, including profitability and returns metrics, the quality of working capital management, key corporate governance metrics, strength cash flow generation across various cash flow definitions, the level and proportions of short- and long-term indebtedness, debt and interest servicing capacity, debt coverage and other credit metrics. The banks are ranked in terms of a more applicable set of metrics and ratios: balance sheet composition and funding structure including disproportions, asset-liability mismatches and funding stability, quality of income (proportion and relative dynamics of core and non-core incomes sources such as net interest income, net fee & commission income, and non-recurring income), capitalisation (CET1 and other regulatory metrics, capitalisation, leverage, and debt-to-equity ratios), asset quality (non-performing loan ratios, reserve & overall provisioning coverage, dead-bank ratio and the share and composition of securities portfolio), key corporate governance metrics, earnings (key return and margin ratios, cost-to-income and cost-to-asset ratios, net interest spread and net interest margin metrics), and liquidity (the share of highly and quasi-liquid assets, deposit coverage, funding stability and its coverage, loan-to-deposit ratios). Although we share the same set of metrics used by the rating agencies, InvestWatch does not pretend to be a rating agency due to the narrower variety and granularity of the employed metrics and the absence of access to insider company information. The highest score (7 of 7) on the default risk / solvency metric means that the asset ranks in the worst bucket in terms of these credit risk metrics relative to its peers, i.e., it has a very high credit risk. For bonds, the credit quality of both issuer and guarantor are considered. Also, to arrive at an instrument’s credit risk, we adjust the presence and degree of the debt subordination (e.g., junior subordination for perpetual bonds, contingent convertibles, or other hybrid Tier 1 instruments versus senior subordination of classic Tier 2 debt). --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://docs.praa.ms/risk-factors/default-risk.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.