Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Bank Rating Systems: Handle With Care

As commercial banks have mushroomed in post-Soviet Russia, so too has the number of bank rankings and ratings -- with plenty of confusion about what they really mean.


Several Russian newspapers and information agencies publish rankings on a monthly or quarterly basis, using methodologies that are often controversial and sometimes outright misleading, bankers and analysts say.


When Izvestia earlier this year published a safety rating lumping some of Russia's most prominent banks such as Uneximbank and Rossiisky Kredit together with banks like Natsionalny Kredit, defunct since last August's banking crisis, it raised some eyebrows.


So did a 13th-place ranking for Unikombank on Izvestia's "safe banks" list just a few weeks before it was taken into receivership by the Central Bank on May 21. It also had been rated in the A1 "high safety group" by the Rating Information Center, Russia's oldest rating agency, until weeks before it froze all payments.


"It is perfectly possible to have a good rating based on your balance and not be paying on your obligations," said Boris Sergeyev, director of economic analysis at Tokobank.


"You have to know how to read the ratings correctly," said Alexei Ivashenko, executive director of the Rating Information Center. He said the center downgraded Unikombank twice on the eve of its crisis, signaling the problems to those who use the center's services.


For better or worse, the ratings seem here to stay as private and corporate clients grapple with Russia's unpredictable financial system.


"For the banks themselves it is a question of prestige, while many clients, given the startling 'stability,' of the Russian banking system, almost perceive their bank's ranking in the list as an instruction on how to act," said a recent Rossiisky Kredit bank paper on ratings.


Most rankings published in the Russian press fall into two categories: rankings of banks by size, and rankings by quality.


Among the former, the list compiled by the Rating Information Center, ranking banks by their assets, is the most widely used by the media.


This ranking has been published twice a year since July 1991, with a new one due in Izvestia next month, Ivashenko said. He said the agency initially chose to rank banks by the size of their assets because it is the "most easily accessible method."


"Banks with large assets ... can keep afloat for some time in a crisis situation, whereas banks with small assets collapse," he said.


But some analysts say the size of a bank's assets is not necessarily a good indicator.


"I would prefer to think of a bank in terms of its capital rather than its assets," said Mike Flood, partner in charge of financial services with Coopers & Lybrand in Moscow. He added that rankings in terms of pure capital can also be "very misleading" if they are not based on an analysis of the bank's books.


So far, most ratings in Russia are based on figures supplied by the banks, a system fraught with potential pitfalls.


"The problem is not so much in the ratings as in the way the accounts of Russian banks are balanced," Sergeyev said.


If a rating is based on an institution's own figures and Russian accounting standards, it is "very difficult if not impossible" to give a fair rating, Flood said.


"It is no secret that certain banks calculate some of the figures in their balances to get the showing they wish. Some exaggerate their capital to appear more sound; others hide their profits from taxation," said the paper from Rossiisky Kredit bank.


"We trust the banks, but we also check up on them," said Ivashenko, who added that his agency analyzes figures the banks report to the Central Bank.