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).