Training on sovereign risk credit analysis, October 24

Regulation has made ratings more credible in Russia

A Russian ratings industry survey

  • Credit ratings are more often used than trusted. According to a recent survey conducted among financial market participants, 66% of respondents stated that their trust level relative to credit ratings stayed unchanged over the past year, while 24% of interviewees admitted a decrease in rating confidence and only 8% boasted an increase. When asked about credibility factors, 52% of survey participants claimed their absence. A critical attitude to ratings coupled with a their intensive usage is a typical worldwide trend.
  • State regulation tightening is the main credibility driver. 75% of respondents see state regulation tightening in the rating sector as a positive or neutral factor, while 33% survey participants regard it as a driver fostering rating confidence growth. As a confidence growth factor, state control tightening has even outpaced the ‘correct risk assessment’.
  • Wrong forecasts are to blame for mistakes. 83% of respondents relate the most notorious mistakes by rating agencies to bad predictions (poor-quality forecasting systems, inability to foresee the future), while 80% of survey participants noted that these errors produce no negative effect on the Russian financial market – something that distinguishes the latter on the global scale, where rating agencies are often blamed for the 2008 financial crisis.
  • Global and Russian reputations are equally important for issuers. Of all the factors affecting client choices of rating agencies, the one called ‘reputation on the global market’ fetched the maximum score in the survey, while the one titled ‘reputation on the Russian market’ underperformed.

Ratings are still widely used, but less relied on

Survey participants were somewhat skeptical about credit ratings, although 74% of them do take these ratings into account while making investment decisions.

Over the past year, 66% of respondents saw their level of rating confidence unchanged, while with 24% of survey participants it declined and only 8% of interviewees admitted becoming more rating-confident (Figure 1). A trend to disregard cases fostering rating confidence that revealed in some half of the answers (52% of cases) reflects a common trend of generally critical attitude to ratings (Figure 3).

Among the respondent groups, the maximum increase in rating confidence over the past year was shown by representatives of public authorities (23% of them became more rating-confident), while the minimum growth was seen in the financial sector (in fact, 30% of the group saw their confidence drop), with the corporate sector posting the most stable performance (the trust level here stayed flat at 77%). The confidence level depends much on the scales used, with 75% of those who rely only on the national scale seeing their rating confidence on the downside (Figure 2).

Figure 1. Over the last year, your confidence in credit ratings assigned by agencies working on the Russian market…

Source: ACRA

Figure 2. …and I usually use ratings based on…

Source: ACRA

Regulation is the main confidence driver

Sate control tightening in the Russian rating industry has not been denied as a positive or neutral factor for market development by 75% of respondents (Figure 4), while 33% of survey participants consider this as a confidence growth factor. In this quality, increased government regulation has outpaced even the ‘correct risk assessment’ – a criterion chosen by 18% of respondents (Figure 3). To remind, the year 2015 saw an adoption of the Federal law N 222-FZ “On the Activities of Credit Rating Agencies in the Russian Federation”, which has set the new principles of rating activities regulation in the country, with regulatory requirements mentioned as an impetus to getting a rating by 38% of survey participants.

Among the factors marring ratings confidence over the past year, the most important ones, according to survey participants, were the ‘risk underassessment and delayed reaction’ (66%) and the ‘rating divergence with capital markets’ (38%). In a column where respondents could designate a factor of their own, most of them pointed to a problem of ratings being dependent on political issues.

Figure 3. What factors contributed to rating confidence growth?*

*Multiple answers were allowed.
Source: ACRA

Figure 4. What factors contributed to rating confidence decline?*

*Multiple answers were allowed.
Source: ACRA

Bad forecasting entails mistakes

As many as 83% of respondents relate the most notorious mistakes by rating agencies with wrong predictions, with 42% of survey participants blaming poor-quality forecasting systems, while 41% making a point about the very impossibility to foresee the future as such.

Conflict of interest as a cause of rating agencies’ mistakes was referred to by 39% of respondents, while 37% of survey participants expressed concern about professionalism of analysts and another 33% pointed at methodology errors (Figure 5).

More than half of interviewees (58%) stated that ratings have a strong influence on the financial market, with most of them (38%) being confident that this entails no negative consequences for the market (Figure 6). Those who did notice a negative impact on the financial market arising from mistakes by rating agencies accounted for only 19%, and those who accused rating agencies of the 2008 financial crisis amounted to just 1% of all survey participants. This is what makes the Russian market distinctly different from to the rest of the world where rating agencies are often blamed for the financial crisis of 2008.

Figure 5. What caused mistakes in rating assignment?*

* Multiple answers were allowed.
Source: ACRA

Figure 6. Do you believe that ratings have an excessive impact on the Russian financial market?

Source: ACRA

Opinions divided over the market condition

While 57% of respondents believe that the credit ratings market in Russia is monopolized, the other 43% of survey participants consider it competitive. This pattern fundamentally differs from the global situation, where the rating industry is almost unanimously referred to as monopolized. The main question discussed globally does not even concern the issue of competitiveness or monopolism, but focuses instead on whether the monopolized condition of the market contributes to rating quality or not. Academic research rejects neither of these points of view.

As far as our survey is concerned, 70% of respondents claimed that monopolism reduces the quality of ratings while competition improves it (36% of survey participants believe that the Russian market has been monopolized and rating quality has been negatively affected, although 34% of respondents stick to the opposite opinion, while regarding the sector as a competitive one and, therefore, rating-quality-friendly). Only 30% of interviewees believe that monopoly is better for the market than competition.

Figure 7. How would you gauge the level of competitiveness in the Russian credit rating sector and whether this is beneficial or harmful to rating quality?

Source: ACRA

Global and Russian reputations are equally important

Of all the factors affecting client choices of rating agencies, the one called ‘reputation on the global market’ fetched the maximum score of 4.2 points on a scale ranging 0 to 5, while the one titled ‘reputation on the Russian market’ followed closely scoring 4.1 points, but still underperformed (Fig. 8).

The ‘large number of other issuers’ ratings’ landed at 3.5 points followed only by the ‘cost of services’ showing just 3.3 points. Meanwhile, the Russian market in general does see a very high level of dissatisfaction with credit rating coverage, with 48% of respondents considering rating coverage of Russian issuers insufficient.

Figure 8. Name the most important criteria for selecting a rating agency (5 — maximum importance, 0 – minimum importance)

Source: ACRA

Figure 9. Are you satisfied with the credit rating coverage of the Russian market?

Source: ACRA

Appendix. Russian rating sector evaluation survey results

0. Respondents’ profile

0.1 What group of market participants do you belong to?

0.2 Is the company you represent a rating object?

0.3 Have you ever worked with rating agencies for obtaining a credit rating?

0.4 How well do you believe you know the field of credit ratings? For example, do you know the difference between international and national rating scales?

0.5 Do you take credit ratings into account while making investment decisions?

0.6 You use credit ratings based on…

1. A correct estimate of future risks

1.1 Over the last year, your confidence in ratings assigned by agencies operating
on the Russian market…

1.2 What events occurred over the last 12 months that helped increase confidence in ratings assigned by agencies operating on the Russian market?
(multiple answers were allowed)

1.3. What events occurred over the last 12 months that could challenge the objectiveness of ratings assigned by agencies operating on the Russian market?

(multiple answers were allowed)

1.4 What would you attribute to rating agency mistakes that you know of in credit risk assessment? (multiple answers were allowed)

2. A strong influence on the market with substitution of state functions

2.1 Do you believe that ratings have an excessive impact on the Russian financial market?

2.2 Is it acceptable for you that ratings represent only an opinion of a rating agency
and formally the latter is not responsible for them?

2.3 If you believe that rating agencies have a significant influence and yet formally
are not responsible for their assessments, then, perhaps, the rating function must be
reassigned to a state authority?

2.4 Could you gauge competitiveness in the Russian credit rating sector and assess
whether it contributes to rating quality?

3. A “paradox”: ratings are used by investors, but issuers pay for them

3.1 Do you see a conflict of interest in the fact that issuers pay for their
ratings themselves?

3.2 Who should pay for credit ratings?

4. Availability of credit ratings (questions for issuers)

4.1 If your entity has a credit rating, the impetus for obtaining it was…
(multiple answers were allowed)

4.2 Name the most important criteria for selecting a rating agency
(5 – maximum importance, 0 – minimal importance)

4.3 Do you think that services provided by credit rating agencies are
affordable for Russian issuers?

4.4 Do you find rating agencies’ requirements for obtaining a credit
rating acceptable?

4.5 Are you satisfied with the credit rating coverage of the Russian market?

4.6 Are you satisfied with rating agencies’ information disclosure?

4.7 What extra services and products by rating agencies do you use
or would like to use?
(multiple answers were allowed)

 

Log in

Forgot password

Sign up

Reset password

Reset password

Termsofuse

Полное использование материалов сайта разрешается только с письменного согласия правообладателя, АКРА (АО). Частичное использование материалов сайта (не более 30% текста статьи) разрешается только при условии указания гиперссылки на непосредственный адрес материала на сайте www.acra-ratings.ru . Гиперссылка должна быть размещена в подзаголовке или в первом абзаце материала. Размер шрифта гиперссылки не должен быть меньше шрифта текста используемого материала.