Are Credit Ratings Between Agencies Equivalent?

There are three major credit ratings agencies operating in Australia being Standard and Poor’s (S&P), Moody’s Investor Services (Moody’s) and Fitch Ratings (Fitch).  It has generally been accepted in the market and by investors that ratings from all three rating agencies have a degree of equivalence where the same letter rating from each agency denotes a similar level of risk; however is this actually true in practice?

To test this assumption, Amicus examined the credit ratings of 45 of the most frequent ADI issuers of Term Deposits or Floating Rate Notes into the Australian market.  Some of these entities were rated by only one agency, but for those ADI’s rated by two or three of the agencies we were able to produce the comparative table below:

The table clearly illustrates where both Moody’s and S&P rate the same ADI on average the Moody’s rating is 0.8 (or almost 1 notch) higher.  Where Fitch and S&P rate the same ADI the Fitch rating is 0.4 (or just under half a notch higher) and where Fitch and Moody’s rate the same ADI on average the ratings are the same.  Within each category there is of course dispersion in the opinions with, in some cases, one rating agency rating the issuer two notches above or below another ratings agency.

To delve further into what appears to be a more stringent approach from S&P relative to the other two ratings agencies Amicus finds the majority of differences between Moody’s and S&P’s respective opinions comes in the area of the larger mutuals where Moody’s rates more highly.  Example are:  CUA, Newcastle Permanent Building Society, ME Bank, People’s Choice CU, Bank Australia (MECU), Bankfirst (Vic Teachers), Teachers Mutual Bank (NSW Teachers CU).  Interestingly, none of these entities carries a Fitch rating leading Amicus to the suspicion these entities have specifically sought a Moody’s rating in addition to their S&P rating because of Moody’s more lenient approach. A second rating from Moody’s may enhance the perception of each entity’s credit-worthiness, both by getting a second independent opinion and also by virtue of that second opinion being more favorable than the original.

This wariness of a degree of ratings shopping away from S&P is enhanced by also looking at the only three entities in the study rated by both Moody’s and Fitch but not S&P.  These are Auswide that was rated BBB- by S&P and Baa2 by Moody’s, but then received a rating of BBB+ from Fitch and immediately dropped its S&P rating; IMB that is currently rated Baa1/BBB+ (Moody’s and Fitch) but was formerly rated BBB by S&P in 2017 before asking for the rating to be withdrawn before seeking a rating from Fitch earlier this year and; Heritage Bank which asked for its S&P rating to be withdrawn in 2012 when S&P downgraded it from BBB to BBB- while it maintained an A3 rating from Moody’s (three notches higher relative to S&P after the downgrade).  Heritage is currently rated Baa1/BBB+ (Moody’s and Fitch).

Other ADI’s who have also asked S&P to withdraw their ratings are Qudos Bank which dropped its BBB- rating from S&P in August 2019 while maintaining its rating of Baa1 from Moody’s (2 notches higher) and My State Bank in Tasmania which asked for its S&P rating to be withdrawn when it was downgraded to BBB- from BBB while maintaining a Baa1 rating from Moody’s (2 notches higher).

Even the large regional banks, Bank of Queensland and Bendigo Adelaide Bank, which are rated by all three agencies, are BBB+ rated by S&P but A3 from Moody’s and A- from Fitch (1 notch higher than S&P).

Can we therefore tentatively conclude that empirically a Moody’s or Fitch rating should not be seen as the equivalent of an S&P rating, but in fact perhaps one or two notches lower for domestic ADI’s outside the major banks?   Amicus is a little cautious about drawing this conclusion because S&P’s rating methodology involves beginning with a stand-alone credit anchor for each country’s ADI’s.  S&P last altered this in May 2017 causing S&P to downgrade 22 ADI’s (including all the aforementioned ADI’s in this article where they were rated by S&P) and had this not occurred the differences would be much less. Hence a very small change in S&P’s view regarding the banking and economic environment in Australia that leads to a jump shift in the stand-alone credit anchor for all ADI’s moving it back to A- from BBB+ can potentially eliminate much of this difference.  This being said there is evidence of “ratings shopping” and this does seem to be a real issue and so investors should potentially be somewhat more cautious if an ADI has dropped its S&P rating in favour of a higher one from Moody’s or Fitch.

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