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Dedication

I dedicate my work to my Honorable parents And my Family and Respectable Teacher Sir Syed Atif Ali Whose efficient & Magnificent Devotion to my studies Encourages me to achieve this.

Acknowledgement I would like to thank the following persons without whose guidance this dissertation could not have been completed. First of all I would like to thank my ALLAH who always guides me in every walk of my life. Secondly, I would like to express my sincere appreciation and gratitude to my supervisor Prof.Sayed Atif Ali for his guidance and insight throughout in making my dissertation and especially, his valuable suggestions and comments that really guided my research and also helped me to structure my dissertation. Thirdly, I am also very indebted to my parents and family and my friends Ashfaq Ahmad, Haseeb Ahmad, Hafiz Abdul Manan, for their continuous support. I owe lot of their unconditional love and understanding. Well, their suggestions allowed me to think in many different ways. Most importantly, they continually helped me to improve my confidence. There were certain times, when I used to say that I just did not think I could go on with my studies, but they always knew just what to say to get me back in the race. They really very special entities of my life. What a journey!! I will never stop admiring them.

Table of Contents

Dedication

Acknowledgement Abstract Introduction Research Question/Data Method/Data Collection/Sample Literature Review Frame Work Pakistani banks rating last 5 years Banking Sector of Pakistan Financial/Historical/Current situation Empirical findings Analysis & Discussion Conclusion/Recommendation References

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Abstract: Financial sector of an economy plays an important role in its economic development and prosperity of the country. Banking industry serves as the backbone of the financial sector that accumulates savings from surplus economic units in the form of deposits and provides it to deficit economics units in the form of advances, banking industry provides support to economy and industries in specific in the time of recessions and economic crisis. But when banks are the heart of economics recession or banks are the cause of financial crisis like the recent past financial crisis 2007- 2009, it makes the situation worst for economic recovery. So it is of great importance to kneely observe the performance of the banks and their compliance with the regulatory requirements. Performance of banks is measured at two levels, one is at the management and regulatory level of the banks and another is at external rating agencies, purpose of regulatory and supervisory rating system is to measure the bank performance at internal level and its compliance with regulatory requirements to keep the bank on right track. These ratings are highly confidential and are only available to the bank management. External credit rating agencies examine and evaluate the banks and issue ratings for the general public and investors in particulars. It is great importance that both these ratings present the same results about the condition of banks to provide clear information to investors and management. In past several banks suffer from bankruptcy that was the failure of both internal ratings system and credit rating agencies. CAMELS is the supervisory and regulatory rating system implemented by State Bank of Pakistan. It takes into account six important components of a bank when it evaluates performance of the bank. These components are Capital assets, Management, Earning, Liquidity, and sensitivity to market risk. Rating is assigned to these components on the scale of 1 to 5 and that is a base for composite rating that also ranged from 1 to 5. PACRA rating agency is the dominant credit rating agency of Pakistan that performs ratings for most banks and industries in the country. In my study I examine credit ratings of 5 Pakistani banks, ALLIED BANK LIMITED, ASKARI BANK LIMITED, BANK Al-HABIB, BANK al FALAH, and MUSLIM COMMERCIAL BANK. First of all I collected the credit ratings of these banks mention above of last five years from 2007 to 2011. And the credit rating agency of these banks is PACRA, this research of last five year credit ratings of banks PACRA show both long term and short term credit rating of these 5 banks for last 5 years. In this study I calculated the ROA of 5 banks also to see what the return on assets of banks is at last 5 years. And provided some financial data regarding these banks.

Introduction: A credit rating evaluates the credit worthiness of a debtor, especially a business or a government. It is an evaluation made by a credit rating agency of the debtors ability to pay back the debt and the likelihood of default. Credit ratings are determined by credit rating agencies. The credit rating represents the credit rating agencys evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. the credit rating is used by determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agencys option that the company or government has a risk of defaulting, based on the agencys analysis of the entitys history and analysis of long term economic prospects. First of all I will discuss credit rating institutions in general and their role in subprime financial crisis: Credit rating agencies and financial market stability: Credit rating agencies (CRAs) issue credit worthiness estimation that assist triumph the information asymmetry flanked by those who are issuing debt instruments such as bonds, and those who are investing their money in these instruments. Credit rating agencies have a foremost impact on the financial markets. Rating issued by CRAs are closely tracked by investors, borrowers, issuers and governments, it is indispensable that they time and again provide top quality, sorveign and objective credit ratings. Credit rating market is dominated by three outsized agencies operating globally: They are Standards and Poors, Moodys investors service and Fitch ratings. These three markets leading CRAs have a collective market share over 90 % globally. In Europe a small no of CRAs operate with an obvious focus on specific industry segments e.g. insurance industry sector or financial market sector e.g. municipal bonds, thus reacts to specialized market needs. In total, around 50 credit rating agencies are established all over the Europe (Balz, p6, 2010) Credit rating agencies have very considerable impact on the operation of the financial markets, as the credit ratings are used by investors, borrowers, issuers and government as part of making informed investment and financing decisions. It is therefore essential to ensure that the regulatory and supervisory framework in which CRAS operates is sufficiently robust and
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effective to satisfy the general objective of, contributing to the stability of financial markets, enhancing investor protection, facilitating a sustainable development of fair and transparent financial markets (Balz, p11, 2010). Rating agencies basically provide assistance to the dispersed investors in managing issuers in the debt capital market. By allocating prices measure of credit quality to debt issues, depend on the analysis issuer information based on financial performance. CRAs can remove the information asymmetries between investors and borrowers (Deb. P et al, 201, p3) rating is formally used for the forward looking and subjective, beside this there are many quantitative and qualitative indicators come across during CRAs assessment. Therefore rating is different from the accounting ratios which mainly provide information about the back looking indicators, provide information about the financial stability based on standard measures and principles. Rating agencies play the role to mitigate the adverse selection problem arises between debt issuers and investors. In such situation, capital market freeze there functions. A risk adverse investor may stay out of the market or invest in securities which return is very high risk premium (Deb. P et al, 2011, p.3). CRAs and current financial crisis: In USA and Europe flawed credit ratings and faulty rating procedures and methodologies are broadly perceived as being amongst the major contributors to the worldwide financial crisis. Those allegations bring them under severe scrutiny and led to suggestions for drastic reforms. Credit rating agencies have been widely condemned for their part in fueling the untenable development of the asset backed controlled finance debt market that is considered as a major means for the global financial crisis (Smith,p1, 2009). In the US banking industry, they are use 6 banks assets, profitability, and size and leverage data collected from the Federal Deposit Insurance Corporation, Call reports and Bloomberg from the period of 1989 to 2008. They show credit rating Upgrades and Downgrades. And the result shown that downgrades has a lasting and relatively more severe impact on banks and upgrades. Each bank has his own credit rating, and they use three criterias in order to properly function as candidates controls for the treated banks: 1- The untreated bank must have the same rating as the treated bank at t. 2- Its rating remained unchanged for one year after unit t+1 3- For each treated commercial bank or bank holding company, a commercial bank or bank holding company, respectively, that satisfies the criteria 1 and 2 is distinguished as candidate control. (US banking Industry). The banks rating system differ significantly from agencies ratings. Banks in different lines of business or using internal ratings for purpose design and operate different systems that meet their needs. In few cases banks scale uses ratings in computing the relatively few grades is adequate, whereas a bank using in computing the relative probability of different loans may require a scale with many grades in order to achieve one distinction of credit risk. The most banks internal
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rating system introduced to support loan approval and loan monitoring process and to support is best for all banks. (William F. Theary) The downgrading and upgrading are different types of process. Downgrading is memory less process, whereas, upgrading is not the longer a rating has not changed, the higher the probability that it will be upgraded. The rating express the creditworthiness of obligors with rating in letter form .AAA is the highest rating whereas CCC is the lowest. (N. Jonker) Two types of credit rating systems are used one is internal rating system and another is external rating system. Internal credit ratings do not contain all the information about borrowers that is in incorporated in the credit bureau ratings, even though the credit bureau ratings are available to the bank loan officers. (Leond l Nakamura). Banking Sector of Pakistan: Economic prosperity is a symbol of success of a country. Soundness of an economy is achieved through positive macroeconomic indicators that become possible via bringing together and proper utilization of country resources such as financial, informational, physical and human resources etc. banking sector of a n economy is an important constituent of financial sector of a country that facilitates proper utilization of financial resources. Since independence of Islamic Republic of Pakistan in 1947, banking industry of the country has undergone through several fundamental changes. Central bank of a country that is named as State bank of Pakistan was established 1st July 1948. SBP act 1956 encouraged private sector investments in the banking industry to establish banks and financial institutions. In the 1974 government decided to take control of all of the existing banks in the economy and they were nationalized. This decision was the bad consequence of bad economic conditions that emerged after separation of Bangladesh that was part of Pakistan since 1947 to 1971. After nationalization of all these banks, their performance was very much affected. Their performance was deteriorated to the alarming point in last years of 80s decade, this cause privatization of banking sector in early 1990s. In 2002 first Islamic commercial bank that is named Meezan Bank was found and started its operations. (Ahmed, et al 2010) PACRA Rating Agency: Pakistan credit rating agency is the first national rating agency that was founded in the year 1994 as a joint venture of international financial corporation (IFC), Lahore Stock Exchange (LSE) and International Bank Credit Analysis (IBCA). It is usually known as PACRA. The main objective of PACRA is to assess the capability and eagerness of a business entity to honor its financial commitments. Ratings published by PACRA reflect sovereign, proficient and unbiased evaluation of the credit risk that is coupled with a debt certificate /instruments or an overall position of a corporate entity. Analysis and rating of banks is based upon several qualitative and quantitative factors and all these factors have same weight age and importance in the rating process. Factors that are taken under consideration in PACRA rating 5 methodology and risk
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management, funding and liquidity, capitalization, earning and performance, diversification of business and franchise and corporate governance. Under the risk management, PACRA analyzes the risk management process implemented by the banks, there adherence to polices implemented and its focus on all risks that stick to the banks such as credit risk, and operational risk. To analyze composition of the banks funding diversification of its funding base, source of its funding and liquidity. PACRA use its own set of standards to analyze the capitalization that is applied to all banks. One of the important measures is pure common equity to a proportion of total banking assets. While analyzing the quality of the earnings, PACRA takes into account the chronological inclination in banks earning, quality and stability in the banks earning and its future competence to produce earnings. Under this section of analysis diversification of the business activities commenced by the bank in different geographical and industrial segment and diversification in business products and services are analyze by PACRA. PACRA assess the quality of banks corporate governance data on several qualitative and quantitative measures (PACRA, 2005) Know here I am showing the last 5 years financial analysis of: Allied Bank Limited Askari Bank Limited Bank Al- Habib Bank Alfalah Limited Muslim Commercial Bank

ALLIED BANK LIMITED: (PKR MILL) 2007 Total assets 320,109.7 Equity 18,408.4 Net income 4,076.1 ROA% 1.27 ROE% 23.54 Equity/assets% 5.75 Sbp CAR% 9.29 2008 366,680.2 20,805.1 4,156.7 1.13 21.2 5.67 10.9 2009 418,374 25,891 7,122 1.71 30.5 6.2 13.5 2010 449.932 31,167 8,225 1.84 28.8 6.9 13.8 2011 515,888 37,761 10,256 1.98 27.16 6.9 13.43

ASKARI BANK LIMITED: (PKR MILL) 2007 Total assets 182,171 Equity 12,099 Net income 2,681 ROA% 1.47 ROE% 22.16 Equity/assets% 6.6 Sbp CAR% 9.35 2008 206,191 12,034 386 0.19 3.21 5.8 9.22 2009 524,327 13,142 1,108 0.42 8.12 5.2 11.75 2010 314,745 14,821 943 0.29 6.20 4.7 10.3 2011 343,865 16,585 1,705,207 0.49 10.28 4.8 11.34

BANK Al-HABIB LIMITED: (PKR MILL) 2007 Total assets 141,234 Equity 8,014 Net income 22,11 ROA% 1.57 ROE% 31.2 Equity/assets% 5.7 Sbp CAR% 10.4 2008 177,324 9,967 2,425 1.37 27.0 5.6 11.1 2009 249,806 12,286 2,856 1.14 25.6 4.9 14.9 2010 301,533 14,706 3,602 1.22 26.7 4.9 12.8 2011 384,525 17,837 4,537 1.17 25.37 4.6 16.86

BANK ALFALAH LIMITED: (PKR MILL) 2007 Total assets 328,895 Equity 13,766 Net income 3,130 ROA% 0.95 ROE% 25.7 Equity/assets% 3.8 Sbp CAR% 9.8 2008 348,999 14,608 1,301 0.37 9.2 4.1 8.0 2009 389,070 19,770 897 0.23 5.2 5.1 12.5 2010 411,483 19,726 968 0.24 4.9 4.8 10.5 2011 468,345 23,126,022 432,588 0.92 18.70 4.9 11.6

MUSLIM COMMERCIL BANK: (PKR MILL) 2007 Total assets 410,485 Equity 45,414 Net income 152,65 ROA% 3.72 ROE% 37.6 Equity/assets% 11.0 Sbp CAR% 17.8 2008 443,615 52,244 15,374 3.47 31.4 11.7 20.7 2009 509,223 61,075 15,495 3.06 27.3 11.9 19.0 2010 567,553 69,180 16,873 2.96 26.8 12.1 22.1 2011 656,324 81,034 19,302 2.94 23.82 12.1 21.8

(PACRA and ANNUAL REPORTS) Problem background: The financial sector play an important role in the economy of the country and banks are the major players in this field. Know there are two big companies Bear Stearns Inc and Lehman Brothers Holding Inc, these companies considered a big players in the market in US from last 100 years. These bankruptcies were not anticipated or tracked by regular system or external rating agencies. (lal 2010) Growth of Pakistani banking industry is mention above of last few years. In the present political and economical conditions in the country it is of great significance to analyze and evaluate the banking sector position. Research Question: My study is on credit rating of banks so my resesrch question is: Q. Does credit rating of banks effect on banks performance?

Key term defined: Credit Rating: An estimate of the amount of credit that can be extended to a company or person without undue risk. A credit rating evaluates the credit worthiness of a debtor, especially a business or a government. It is an evaluation made by a credit rating agency of the debtors ability to pay back the debt and the likelihood of default.

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Credit ratings are determined by credit rating agencies. The credit rating represents the credit rating agencys evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Return on assets measures the operating performance of an institution. It is the widely used Indicator of earning and is calculated as net profit as percentage of average assets. Return on equity is a measure that indicates the earning power of equity and is calculated as net Income available for common stockholders to average equity

DATA Method: Selection of the Topic: As for my educational background I am MBA finance student. And I studied several courses about finance. So I develop my interest in Banking. And I choose my topic regarding this as my research focusing on Credit rating of banks and its impact on performance. Data collection: Data collection is an important aspect in any research. There are two types of sources are use for data collection, one is primary source and another is secondary source. In primary source data is collected at first time. Or we can say that data collected for the first time particularly for this research. In primary source data is collected from questionnaires, observations, social survey, interviews. On the other hand secondary data is collected from some published stuff and someone else in the past. In this study I am using secondary data, research papers, articles websites, etc. I read the articles and research papers that were published for public information and visiting several websites to find my target.

Sample: Regarding my study of credit rating of banks. I selected 5 Pakistani banks are ABL, ASKBL, Bank Al-Habib, Bank Alfalah, and MCB. Collected data from their Annual Reports and PACRA Pakistan credit rating agency. And also show the Total Assets, Equity, Net Income, ROE, ROA, Equity/Assets and CAR for understand the credit ratings of banks mention above.

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Literature Review: In this study I read the 17 research papers regarding the my study topic Credit ratings of banks and its impact on their performance there are different research papers on credit ratings, credit rating agencies, current rating system of different countries. And the overview of these papers is given below: In the US banking Industry they use the six different banks assets, profitability size and leverage. Collect data from Federal Deposit Insurance Corporation, call reports and Bloomberg for the period of 1989 to 2008. They show credit rating upgrades and downgrade. And the result of the study suggests that a downgrade has a lasting and relatively more severe impact on banks and upgrade. And the downgrade banks do not seem to effectively reduce their appetite for risk over a long horizon. The role of credit rating agencies are same that integral part of banks prudential supervision through part of banks prudential supervision through market discipline is in a long horizon. The main objective of banks is processing of risk and information (Greenbarum and Thakor 2007). The data is used for 370 financial entries for the period of 1987- 2009.and the total observation of the firm year is 4,043. Convert the letter long term issuer credit rating at the end of each year to a numerical scale as AAA=1, AA+=2.D=22, thus the higher number correspond to lower ratings. Each bank has his own credit rating, and they use three criterias in order to properly function as candidates controls for the treated banks: 4- The untreated bank must have the same rating as the treated bank at t. 5- Its rating remained unchanged for one year after unit t+1 6- For each treated commercial bank or bank holding company, a commercial bank or bank holding company, respectively, that satisfies the criteria 1 and 2 is distinguished as candidate control. The result of this study indicates that in the one year horizon after the rating change upgrades results in an increase in net loans and profitability. Turning to the two year horizon after a rating change, upgraded banks continue to increase their loss provisions, while they improve their liquidity position. The finding of this study suggest that a downgrade has a lasting and relative
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more severe impact on banks than an upgrade; yet downgrade banks seem to not effectively reduce their appetite for risk in a longer horizon. The role of credit rating agencies as an integral part of banks prudential supervision through market discipline is in a longer horizon, overstated. And this paper finding point to increased supervisions responsibility for deterring banks risk taking behavior especially for downgraded banks and evaluating its performance towards authorities roles in the context of an improved regulation and supervision scheme remains an open question. (Credit Rating Changes Impact on Banks Evidence from the US Banking Industry) The internal rating system is in use 50 largest banks of US banking organizations. They use the illuminate relationships between uses of ratings, different options for rating system make an understanding of such relationships important for both banks and regulators. The banks rating system differ significantly from agencies ratings. Banks in different lines of business or using internal ratings for purpose design and operate different systems that meet their needs. In few cases banks scale uses ratings in computing the relatively few grades is adequate, whereas a bank using in computing the relative probability of different loans may require a scale with many grades in order to achieve one distinction of credit risk. Changes in banks business and its uses of ratings can cause form and function to diverge, placing stress on its rating systems that are neither anticipated nor immediately recognized. Failure to relive severe stress can compromise the effectiveness of a banks credit risk management. The most banks internal rating system introduced to support loan approval and loan monitoring process and to support is best for all banks. Banks system vary widely largely because of differences in business mix and in the uses to which ratings are put. Among variations in business mix the share of large corporate or institutions loans in a banks portfolio has the largest implications for its internal rating system, because they give bank staff with a personal interest in transactions and incentive to rate too favorably. (Credit Risk Rating System at the largest US Banks William F. Theary, Markcarey) Credit and interest rate risk are two of the most important sources of risk for commercial banks. Credit and interest rate risk reflect the possibility, respectively, of a borrower failing to repay her or his debt and of a fall in a banks profitability due to a change in interest rates. While banks and regulators are aware of the importance of both risks, they tend to manage these risks separately. However, credit risk and interest rate risk are intrinsically related to each other and not separable. And ignoring this interdependence may potentially have relevant implications for banks stability, especially during severe downturns. A general framework to measure the combined impact of interest rate and credit shocks on banks economic value and profitability. And this framework incorporates the integrated impact of credit and interest rate risk on banks assets. But liabilities and off balance sheet items also need to the taken into account to obtain a complete picture of the risks off balance sheet items also need to be taken into account to obtain a complete picture of the risks faced by a bank. There framework also capture other forms of interaction between credit and interest rate risk. For example, they do not capture the direct
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impact of changes in macroeconomics variables, such as unemployment, on the profitability of borrowers defaulting, but also their indirect via potential changes in default free interest rates. The stability of bank is not threatened in this streets sanerio as both the economic value and capital adequacy conditions hold. But the simulation confirms that interest rate and credit risk have to be assessed simultaneously as well as jointly for the whole portfolio. In this stress sanerio, the bank experiences not only an increase in bad loans, but also a fall in net interest income. (The Integrated impact of credit and interest rate risk on banks: Mathias Drehmann, Steffen Sorensen and Marco Stringa) N Jonker analysis credit rating transactions of banks in Europe, US and Japan by using a competing risk model. They distinguished two types of rating transitions: Upgrading and Downgrading They used some bank characteristics, like country of domicile, type of bank, initial rating, as explanatory variables in their model. They found that downgrading and upgrading are different types of process. Downgrading is memory less process, whereas, upgrading is not the longer a rating has not changed, the higher the probability that it will be upgraded. Furthermore the type of bank and country (Japan) matters in the downgrading process but not in the upgrading process. Banks which have a speculative rating show much more volatility in both upgrading and downgrading intensities than banks with an investment rating. They use of data from Bloomberg covering the period January 1990 to June 2002. The credit rating that they use is from standard & poors. a firms credit rating reflect the assessment of the firms capacity to pay interest and to repay the debt according to the terms of issue. The rating express the creditworthiness of obligors with rating in letter form .AAA is the highest rating whereas CCC is the lowest in this data. On top of the standard and poors can ddd- signs to the ratings indicating the probable direction of the next change in rating. They collected data from 625 total banks, 320 banks in US, 230 in Western union, and 75 are Japanese. In 1990 114 banks got a credit rating of which 107 were in US and only 7 in Europe. At last they found some interesting results. There are some signs that are upgrading process and the downgrading process may differ. Some types o banks seem to be downgraded more often than the reference type of banks commercial banks, whereas this does not occur with regard to upgrading. (Credit Rating of the Banking Sector: N. Jonker Research Memorandum WO no 714) Nachane, DM and Ghosh, investigate the impact of credit rating on capital adequacy ratios of Indian state owned banks using quarterly data for the period of 1997 to 2002. The variables that can impinge upon capital adequacy ratio have been used as explanatory variables. Two separate models, one for long term credit rating and another is for short term ratings, in this capital adequacy ratios are an important impinging on credit rating of Indian banks. This study employs quarterly off site monitoring and surveillance (OSMOS) data for selected Indian owned state banks which have obtained long/short term rating over the period of 1997 to 2002, and several
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points about the data are in order. In order to conclude this study claims on banks would overall attract higher risk weights, irrespective of whether they continue to remain unrated or obtain ratings, internal or external, since the present ceiling of 20 per cent would then become a floor. With most corporate being unrated, there would be no major change in the overall risk weight on good quality assets, and there could even be lower risk weights for premium borrowers. However non performing loans would attract the 150 per cent risk weight up from the 100 per cent at present and hence require more capital support them. Overall the conclusion is instable that the new Accord would require net additional capital for the Indian banking system as a whole. (Credit Rating and bank behavior in India: Nachane, DM and Ghosh, Saibal Reseve Bank of India) Leond l Nakamura, the basket of straight forward techniques are purposed enable both financial institution and regulators to assess the performance of banks credit rating systems. They using both internal bank credit ratings and external credit bureau ratings of corporate borrowers, they investigate if bank credit ratings are able to forecast the ratings of a public monitor, like a credit bureau. And the techniques are also being applied to bond ratings for longer commercial loans. They using data from two major Swedish banks, they find the stronger evidence that these banks relative to a credit bureau that produces ratings using public information only, obtain private information about their clients and incorporate this into their internal credit ratings. However they also show that these banks internal credit ratings do not contain all the information about borrowers that is in incorporated in the credit bureau ratings, even though the credit bureau ratings are available to the bank loan officers. There finding can be interpreted in two ways one is that banks fail to incorporate publicity available information optimally. The other is the banks lose information in the process of generating credit ratings. Irrespective of the interpretation, there finding imply that it is not optimal for either banks. Risk managers or for their regulators to accept the banks own private ratings as the single measure by which to evaluate of portfolio credit risk. Instead it would be beneficial for both of them to incorporate more information into a risk review in particular, credit bureau ratings could be used to improve overall portfolio risk evaluation. It is possible that through use of this test banks may improve on the credit ratings that they employ to evaluate borrowers. (Credit Ratings and Bank Monitoring Ability: Leond l Nakamura, federal Reserve Bank of Philadelphia Kasper Roszbach Sveriges Riksbank May 28, 2010) Harald Hau, Sam Langfield, and David Marques- Ibanez) 2007 to 2009 financial and banking crises have shifted rating agencies and the quality of their opinions into the centre of the policy debate. The issue of rating is closely connected to a largest debate about bank regulation, which is founded on rating contingent bank capital requirements. To inform this debate, the current paper contributes a number of stylized empirical facts about the quality of banks ratings. They ground their analysis on the premise that it is inherently difficult to predict the timing and intensity of a systemic banking crisis this insight informs our
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strictly ordinal definition of rating quality. In this analysis it is not the absolute cardinal level of default risk among all banks. Then they apply this ordinal approach to a large database on bank ratings issued by the three major ratings agencies over the period 1990 to 2011. The corresponding measure of bank distress is the expected default frequency (EDF) measured by the widely used Merton model of corporate default. They draw their EDF measures directly from Moodys in order to avoid any parameter choices which might bias the rating quality metric against a finding high rating quality. Their first concerns the overall quality of ratings. They show the banks ratings in upper investment grade range bear no ordinal relationship to expected default probabilities two years later. The Spearman rank correlation between the credit rating rank and the EDF rank is even slightly negative when EDFs are measured outside of crisis periods. This findings runs contrary to the risk weights applied in the standardized approach to credit risk under the first pillar of the Basel II accord. Under the recommendations of this accord, exposures of financial institution are signed a 20% risk weight if the external credit rating is between AAA to AA-; a 50% risk weight if the external ratings is between A+ to A-; and a 100% risk weight for the lowest investment grades rating from BBB+ to BBB_. There risk weights are used by national bank regulators to determine whether banks meet minimum regulatory capital requirements. But such a large step change in risk weights cannot be reconciled with our evidence that the AAA to AA- bucket is satisfactory indistinguishable from the A+ to A-. Bucket in term of ratings of EFDs. This discrepancy is likely to generate important market distortions. To the extent that minimum regulatory capital requirements bind, they expect banks to other rated AAA to AA- compared with banks rated A+ to A-. These Basel II weights thus distort the market for interbank lending and entrenches the market position rated AA- and above. (Bank Credit Ratings what determines their quality? Harald Hau, Sam Langfield, and David Marques- Ibanez) Credit rating agencies in the business of rating banks claims s one of their main function the assessment of a banks financial strength as measured by its capacity to meets its obligations (without the support of the government bailouts) and its effectiveness to manage risk. To a large extent, these functions are shared by domestic banking supervisors and, therefore, there is a common interest in identifying the best indicators of banks, financial performance. The rating agencies record of prompt identification of banking problems in emerging markets has not been satisfactory, and neither has been that of banking supervisors. This paper suggests that such defiances could be explained by the use of financial indicators that, while appropriate for industrial countries, do not work in emerging markets. Indeed, the results from the empirical analysis conducted in this paper support the view that the particular features markets in emerging markets limit the effectiveness of traditional indicators of bank performance and then alternative system needs to be in place at least in the short run, while these countries improve their legal and regulatory framework and capital markets develop. This paper showed that the most commonly used indicator of banking problems in Latin America East Asia. This is because of two reasons:
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First because of severe deficiencies in the accounting and regulatory framework, the meaning of traditional ratios is extremely limited. Second , bank ratios become less effective when liquid markets for banks shares, subordinated debt and other liabilities and assets are not available to validate the real worth of a bank as opposed to its accounting value. In spite of these problems, an appropriate set of indicators for banking problems in emerging markets can be constructed. But such a system should be based not on the quality of banks loans or on levels of capitalization, but on the general principle that good indicators of banking problems are those that revels the true riskiness of individual banks because they are based on markets that work rather than just relying on accounting figures. Of the alternative indicators proposed in this paper interest rate paid on deposits and interest rate spreads have proven to be strong performers by showing a high degree of accuracy in predicting banking problems. In this paper the first methodology implies that the appropriate of banks performance evolve over time as markets develop. Second, because emerging markets differ significantly among themselves in their degree of financial depth and development, a single set of indicators will not fit all the basic principle that indicators work where markets work is the leading guide to the selection of effective indicators. (Rating Banks in Emerging Markets: Liliana Rojas-Suarez) Bo Becker Todd Milbourn, credit rating performs a function of critical importance to the financial system. They find that the entry of a third major rating agency coincides with lower overall quality, as measured by both the levels and informational content of incumbents, ratings. The negative link between competition and quality is economically robust and unlikely to be explained by the sources of reverse causality and omitted variables bias they examine. It also appears unlikely that ratings shopping or growth in overall market share can explain these patterns. The effect of competition on incumbent quality is of substantial economic magnitude. A one standard deviation increase in Fitchs market share is predicated to increase the average firm and bond rating by between a tenth and half of a step (and increases it significantly more for more highly levered firms). Moving from the 25th to the 75th percent of their competition measure reduces the conditional correclation between ratings and bond yields by about a third and reduces the conditional predictive power for default events at a three horizons by two thirds. Calls for more competition in the ratings industry, such as by the US department of justice (1998, 2009), may deserve a caveat. For regulators and policymakers, it is worth considering that increasing competition in the ratings industry involves the risk of impairing the reputational mechanism that seemingly underlies the provision of good quality ratings. There may obviously be benefits of competition in other areas, including reducing the level of rents in rating agencies and the additional information provided to financial markets by the additional ratings. (Who did increased competition affect credit ratings: Bo Becker Todd Milbourn) Lawrence J. White, The Basel proposal will only exacerbate the demand for ratings but not solve the problem of how credit rating firms should be certified. There is a better way. It would make more extensive use of market information. It would use market spreads directly as indicators of the riskiness of assets, and it would use market value accounting, forward looking stress tests,
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and subordinated debt as vital components of the process of determining adequate capital for banks. These suggestions do not mean that the credit rating firms should be prevented from playing a continuing role in helping issuers and investors pierce the fog of asymmetric information. But that role should be determined by the market participants themselves, not by additional regulation that artificially increases demand and restricts supply. The latter is a recipe for shortage and rents. This is not a welcome prospect. (The credit rating industry: An industrial organization analysis Lawrence J. White) Arturo Estrella, Show the twelve BCBS members countries only Germany does not use credit rating agencies, ratings in its banking supervision. Of the remaining eleven, seven use them only for the market risk amendment (or CAD). On average, BCBS members currently recognize six agencies. Given the relatively recent adoption of the market risk amendment (or CAD), there has not been such change to the list of eligible agencies over time. Most of eleven supervisors use objectivity as one of their recognition criteria. Their use of the other five criteria is more patchily, with two transparency and international access being used rarely, if at all. Only the BCBS members undertake ongoing monitoring of agencies. Split ratings are generally dealt with using the conditions under the market risk amendment for a qualifying item. There does not appear to be a distinction between the treatment of solicited and unsolicited ratings. (Credit ratings and complementary sources of credit quality information by Arturo Estrella) Chung-Hua Shen- Yu-Li Haung- Iftekhar Hasan, presents an information asymmetry hypothesis to examine why banks with similar financial ratios receive different ratings. They use economic development level and institutional environment quality to classify countries into low and high information symmetry groups. The low information asymmetry countries are high income countries, industrial countries and countries fare strongly on institution environment quality. Banks in these countries are expected to have high quality financial statements. In contrast, serious information asymmetry countries are middle income countries, countries in emerging market economies or countries with poor institutional environment quality. Banks in these countries are expected to have a low quality financial statement. The financial ratios are then classified into two groups: positive and negative financial ratios, for which largest and smaller values indicate better performance, respectively. The former comprise profitability. Liquidity and capital and the latter include efficiency and quality. The information asymmetry hypothesis considered here posits that the influence of financial ratios is higher in countries with lower information asymmetry, for both positive and negative ratios, thus strengthening the positive influence of positive financial ratios and then negative influence of negative ones. In contrast, both influences are mitigated in countries with severe information asymmetry. The study results demonstrate that first, without considering the effect of the asymmetric information variable, the five financial ratios shows the expected positive and negative influences on ratings. Second, when employing income as the measure of information asymmetry, for example, by dividing
18

countries into industrial, emerging, high and middle income countries, the hypothesis is supported. In industrial or high income countries, financial ratios have high quality, reflecting the intrinsic value of banks. Ratings agencies, thus assign greater weight to financial ratios in such countries. in contrast , in middle income countries and emerging market countries, the influences of financial ratios are reduced. Negative and positive coefficients of interaction terms are found using positive and negative financial ratios, respectively, reducing the influence of financial ratios. Accordingly even if the quality of capital is opaque or substantially underestimated in these countries, rating agencies cannot help but assign better ratings to banks with greater capital. (Asymmetric benchmarking in bank credit rating: Chung-Hua Shen- Yu-Li HaungIftekhar Hasan) Steinar Holden- Gisle Jaames Natviky Adrien Vigierz ,Finding that reputation concerns on the part of credit rating agencies far from constitute a panacea to the industrys shortcoming first, reputation concerns motivate CRAs to give ratings that push outcomes in one direction, with a view to vindicate ratings ex post, in equilibrium, when investors realize this effect. CRAs are only able to provide very coarse information, simply indicating whether rated objects are above some minimum standard. Second, reputation concerns induce CRAs to exacerbate underlying market conditions. In situations where investors have limited need for liquidity and it therefore is relatively unproblematic to refinance projects. CRAs further reduce coordination risk. On the other hand, in liquidity squeeze where coordination is a severe problems. CRAs only make matters worse. Furthermore, our analysis reveals that while it is explicitly desirable that CRAs stimulate investment, it need not be desirable that they are favorably inclined to issuers. On the contrary, when CRAs effect is purely informational, their incentive structure should be conservative, since otherwise investors will just ignore positive ratings as reacting CRAs biased incentives. While in practice, this implication must be balanced against other concerns, it forcefully, shows that a discussion of the appropriate incentive structure of CRAs cannot treat their impact on real outcomes as given. Their analysis focuses solely on the information providing role of CRA, and ignores their potential effects through regulation, combining the two channels seems a fruitful avenue for further research. (An Equilibrium Model Of credit rating agencies: Steinar Holden- Gisle Jaames Natviky Adrien Vigierz December 18,2012) Richard cantor and Frank Packer, are testing whether the tendency of third rating agencies to assign higher ratings than Moodys and Standards and Poors results from more lenient standards or sample selection bias. More lenient standards might result from incentives to satisfy issuers who are in fact, the purchasers of the ratings. Analysis of a board sample of corporate bond rating at year end 1993 reveals that although sample selection bias appears important, it explain less than half the observed difference in a average ratings. They also investigate why bond issuers seek ratings in addition to those of Moodys and Standard and Poors. Main thing is that they do not find that the profitability of obtaining a third rating is related to levels of ex ante

19

uncertain over firm default probabilities. The most important determinants of the decision are a firms age and size. (Multiple Ratings and Credit Standards: Differences of option in credit rating industry) By Richard cantor and Frank Packer: Federal Reserve Bank of New York December 1995: Pamela Nickell William Perraudin and Siamone Varotto Quantify the dependence of ratings transition probabilities on the industry and domicile of the obligor, and on the stage of the business cycle. Employing ordered probate models, they indentify the incremental impact of these factors. Credit rating published by agencies such as Moodys or Standard and poors played an increasingly important role in financial markets. The significance of agency ratings will be even greater if they are used as a basis for calculating banks regulatory capital as suggested in proposals recently issued by the Basel committee. An important question is to what extent ratings correctly summarize that risks involved in holding a particular exposure. I allocating obligors or bond issues to different ratings categories, rating agencies endeavor to ensure that similar ratings imply similar credit quality in some broad general sense. And the two approaches are used to estimating rating change profitabilitys are implemented. The first is a simple non parametric approach which consists of simply estimating probabilities based on relative frequencies for separate data sets corresponding to obligors of different type sets or observed at different stages of the business cycle. The second approach employs a parametric ordered probate model. This has the advantage that one may estimate the impact on rating change probabilities of a altering a single characteristic of an obligor, holding other characteristics and the stage of the business cycle constant. Japanese ratings transition probabilities were consistent with less volatile ratings than of the US and UK. These crossdifferences are especially important for higher credit quality obligors. Business cycle effects are important particularly for low rated borrowers.

(Stability of Banking Transactions by Pamela Nickell William Perraudin and Siamone Varotto) Bank of England: Sam Hakim and Simon Neaime, investigate the performance and risk in two prominent countries in the MENA region, Egypt and Lebanon, the study covers the 1990s a period that witnessed banking sector reforms towards a more efficient financial system. They investigate the impact of liquidity, credit and capital on banks profitability in each countrys banking sector. (Performance & Credit risk in Banking: A compressive study for Egypt and Lebanon by Sam Hakim and Simon Neaime) Haseeb Zaman Babar, CAMELS is the supervisory and regulatory rating system implemented by State Bank of Pakistan. It takes into account six important components of a bank when it evaluates performance of the bank. These components are Capital assets, Management, Earning, Liquidity, and sensitivity to market risk. Rating is assigned to these components on the scale of 1
20

to 5 and that is a base for composite rating that also ranged from 1 to 5. PACRA rating agency is the dominant credit rating agency of Pakistan that performs ratings for most banks and industries in the country. In their results they examine the similarities in the results generated by the Camels rating system and Pacra rating agency. (Camels rating system for banking industry in Pakistan by Haseeb Zaman Babar) Credit rating agencies supply debtors and investors essential concerning the creditworthiness of companies, an individual or even an independent government. The credit ratings agencies assist evaluate the quantitative and qualitative risks of these bodies and individuals and let investors to formulate wiser conclusions by benefiting from the abilities of specialized risk assessment conceded by the agencies. Quantitive risk analysis conceded by CRAs comprises evaluation of financial ratios with selected levels whereas qualitative analysis spotlight legal, managerial, political and economic situation in a jurisdiction (Sandler) Credit rating agencies assist with risk measures for a variety of entities and make it simple to financial market participant to evaluate and comprehend with the risk implicated in the investing process. Organizations can borrow funds effortlessly from banks without having to go through prolonged assessment from each individual lender individually. Government and corporations can issue debt in variety of corporate bonds and treasuries to magnetize financiers and investors based up on the credit rating (Turrner 2006) Credit rating provided by the most famous and popular rating agencies including Standard & Poors, Moodys and Fitch, have turn out to be a standard for regulation and parameters of financial markets. Framework: Why performance measurement of banking sector? If I talk about financial sector of any country then banking sector play a vital role in the economic development of the country. And as it directs the flow of the funds from surplus economic units of the economy towards deficit economic units (khan 2006) banking industry being a important pillar of financial sector of an economy, its performance measurement cannot be neglected. And the role of the financial institutions and banks in particular in economic development of a country is accepted and acknowledged by Joseph Schumpeter way back in 1911. He argued that functions performance by financial institutions such as mobilizing saving of the surplus units of an economy, risk measuring and management activities, complicated transactions being performed by these institutions and evaluation of the business projects all together increase the pace of economic growth (King & Levine 1993) Goldsmith also argued that size of a financial system plays a vital role in economic development and proved it through his research on a sample of 35 different countries that they positive correlation among each other. Organizations that build a financial sector are run mostly by the public money, so it is very important to measure their performance (Purohit & Mazumder)
21

performance evaluation and measurement of the banks take place at to levels. First management of the bank internally measure and evaluate their banks performance and in the second phase central banks that are usually regulatory controller of all commercial banks in a country critically measure and evaluate performance of the banks. Individual investors and investment institutions are also interested in information regarding performance of individual banks. These investors are also important for the banks as well because they bring money into the organization. For this specific purpose banks avail service of international external credit rating agencies such as S&P Moodys, Fitch or a local credit rating agency such as a PACRA in Pakistan for which they get extensively.(Pyle 1997) CAMEL Rating System: This system was adopted by national Credit union Administration NCUA in October 1987. Camels methodology adopted by North American Bank to know the financial and managerial reliability of commercial lending institutions. To examine the Camels system, information is required from different sources such as financial statements, funding sources, macroeconomic information, budget and cash flow projection, staffing/ operation. This model is perfect to assess the overall condition of the bank, its strengths and weakness (Sarker 2005) Camels stand for capital adequacy represent the relationship between quality and risk weighted assets, how to rise equity and measure the ability to which the organization observe the loan and losses. Asset quality, the quality of a potfolio, assesses the portfolio risk and shows the productivity of long term assets. Management, to know the base of directors functions whether they are performing well or not and its decision making ability. It also evaluates the Human Resource management weather they give support and clear guidance to staff, all the facilities which staff need. Earnings, quantifies the performance of the institution to increase and maintain the total worth through earnings from operations. It also assess the interest rate policy, management examine and adjust the interest rate on micro finance loans and evaluate that adjusted return on assets that how well the assets are utilized. Liquidity Management, securitizes institution liabilities like interest rate, payment terms tenor, etc. it also evaluate the fund meet its credit demand and cash flow requirements. Sensitivity, to assess the risk of the market primarily based on adverse changes in commodity price, interest rate, foreign exchange rate, fixed assets and the ability of management to identify and control these risks. (Trautmann 2006) There are 5 credit rating: Rating 1: It shows safe and sound operations through strong performance and risk management. Rating 2: It shows safe and sound operations through satisfactory performance and risk management practices. Rating 3: In this the performance is marginal, unsatisfactory practices and flawed to some degree, means that weak performance but limited concern for failure. Rating 4; It show below average, poor performance and requires closer supervisory attention and immediate action. RATING 5:

22

It reflects unsatisfactory performance; there is a great chance of failure and very difficult for the management to control. PACRA bank Analysis Frame Work: Analysis of banks rating is based upon different qualitative and quantitative factors and all these factors have same weight age and importance in the rating process. These factors are discussed as under: Risk management: PACRA is focused on all the risks such as credit risk, market risk and operational risk. And for last few years SBP implemented Basel II accord on the banking industry of Pakistan to strengthen the risk management procedures and policies of the commercial banks (PACRA 2005) Credit risk is analyzed on the basis of on-balance sheet activities, on balance sheet activities include loans, fixed income securities and interbank deposits and loans whereas off balance sheet activities include derivatives, guarantees and later of credit (LC). Loans make up the large proportion of banks assets; special attention is given of the portion. Analysis such as size of the loan type of the loans, its currency and the economic sector in which loan is provided. They also consider large exposure of loans to an individual such as more than 10% of the equity, bad debts and non performing loans. PACRA takes into consideration structural and trading risk in analyzing market risk of a bank. To analyze the structure risk PACRA inspect assets and liability management strategies of the banks and the hedging instruments used to offset the fluction in price or interest to cover the unwanted risk Funding and liquidity: Composition of the banks funding diversification of its funding base, source of its funding and liquidity of the banks is analyzed. If a bank is not able to renew its maturing liabilities, this is a great threat and risk for banks funding. This risk can be reduced by diversifying the fund base extend the source of suppliers. The measure the liquidity of a bank, PACRA analyzes liquidity at both internal and external sources. Internal sources include marketable securities and maturing source whereas external sources include capital markets, rediscount of the bills and securities. It is important to measure the liquidity to their portfolio whether they are liquid enough to be sold in market in case of any financial crisis. Earning and performance: Analyzing the quality of the earnings, PACRA takes into account the chronological inclination in banks earning, quality and stability in the banks earnings and its future competence to produce earnings. PACRA analyze earnings of each business line of a bank where they look at the net interest revenue, non interest income, noninterest expenses, provision level and exceptional income and expenditure items. In some cases PACRA make some minor change in the income statement provided by the banks to make it comparable with the other banks in the
23

industry. It also evaluates the management previous record in supply of trustworthy budgets and forecasts. Diversification of Business and Franchise: PACRA also observe diversification in business products and services that are delivered to their customers and their ability to develop new products and services. PACRA also take into account network of the banks franchise spread throughout the country and internationally and their ability to retain their customers on hand and ability to make new customers.

Corporate Governance: Banks corporate governance has an impact on creditworthiness. PACRA assess the quality of banks corporate governance data on several qualitative and quantitative measures. PACRA Standard Rating Scale and Definitions: Long Term Ratings AAA denotes highest credit quality of a bank under examination and lowest expectation of a bank to go into credit risk. This rating is given to the banks very rarely and only those eligible for it who maintains very timely repayment history of financial obligations. AA represents very high credit quality of a bank that is under examination and has very low prospect of credit risk. This rating is assigned to a bank who maintains very good capacity to repay their financial obligation on time. A represents high credit quality of a bank and indicates low expectation of banks credit risk. Bank has a strong capacity to repay its all financial obligations on time. BBB rating represents good credit quality of a bank and signifies that there is less probability of the bank credit risk. Ability of the bank to repay all of its financial obligations is good but changes in economic conditions and circumstances can affect its capacity. BB represents speculative position of a bank Short Term Ratings A+ indicates that all financial obligations are backed by the highest capacity of the bank to repay them when they become due.

A1 denotes that financial obligations are backed by a strong capacity of the bank to repay them when they are mature.

A2 indicates that all financial obligations are supported by the satisfactory capacity of the bank to repay them when they become due.

A3 indicates that financial obligations are backed by a good level of capital capacity for the timely repayment of these obligations but changes in economic conditions and circumstances can affect its capacity to repay them. B indicates that the capacity of the bank to
24

under examination and denotes likelihood of a banks credit risk in development especially if there is any unfavorable economic change. B rating scale represents highly speculative position of a bank and indicates presence of considerable credit risk with the bank. CCC, CC & C: These ratings represent high default risk. Financial position of the bank is very weak and is totally dependent on positive business outcomes or economic changes. CC indicates that bankruptcy is somehow apparent where are C rating indicates forthcoming bank default.

repay their financial obligations is highly suspected to positive business activities and economic conditions. C denotes that bank have less capacity to repay their financial obligations in timely manner.

D indicates that financial obligations are in high risk of default or already in the default.

Pakistani Banks Rating: Regarding my study here I am showing the credit rating of 5 Pakistani Banks from 2007 to 2011: Allied Bank Limited Askari Bank lImited Bank Al-Habib Bank Alfalah Muslim Commercial Bank

Credit ratings of banks update as January 01, 2011: Sr.No Name of Bank Rating Short Agency term 1 Allied Bank PACRA A1+ Limited 2 Askari Bank PACRA A1+ Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA A1+ A1+ A1+
25

Long term AA AA

Date of rating Dec-10 June-10

Remarks

AA AA+ AA+

June-10 May-10 June-10

PACRA Credit ratings of banks update as May 01, 2011: 1 Allied Bank PACRA A1+ Limited 2 Askari Bank PACRA A1+ Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA A1+ A1+

AA AA

June-10 June-10

AA AA+ AA+

June-10 May-10 June-10

A1+ PACRA Credit ratings of banks update as July 20, 2011: 1 Allied Bank PACRA A1+ Limited 2 Askari Bank PACRA A1+ Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA PACRA A1+ A1+ A1+

AA AA

July-11 June-11

AA AA+ AA+

June-11 June-11 July-11

Credit ratings of banks update as February 01, 2010: Sr.No Name of Bank Rating Short Long Agency term term 1 Allied Bank PACRA A1+ AA Limited 2 Askari Bank PACRA A1+ AA Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA PACRA A1+ A1+ A1+ AA AA+ AA+

Date of rating June-09 June-09

Remarks

Plaoed on rating watho

June-09 June-09 June-09

Credit ratings of banks update as June 01, 2010: 1 Allied Bank PACRA A1+ Limited
26

AA

June-09

Askari Bank Limited Bank Alfalah Limited Bank Al -Habib Limited MCB

PACRA

A1+

AA

June-09

Plaoed on rating watho

3 4 5

PACRA PACRA PACRA

A1+ A1+ A1+

AA AA+ AA+

June-09 May-10 June-09

Credit ratings of banks update as July 15, 2010: 1 Allied Bank PACRA A1+ Limited 2 Askari Bank PACRA A1+ Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA PACRA A1+ A1+ A1+

AA AA

June-10 June-10

AA AA+ AA+

June-10 May-10 June-10

Credit ratings of banks update as August 02, 2010: 1 Allied Bank PACRA A1+ AA Limited 2 Askari Bank PACRA A1+ AA Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA PACRA A1+ A1+ A1+ AA AA+ AA+

June-10 June-10

June-10 May-10 June-10

Credit ratings of banks update as October 01, 2010: 1 Allied Bank PACRA A1+ AA Limited 2 Askari Bank PACRA A1+ AA Limited 3 4 5 Bank Alfalah Limited Bank Al -Habib Limited MCB PACRA PACRA PACRA A1+ A1+ A1+ AA AA+ AA+

June-10 June-10

June-10 May-10 June-10

27

Credit ratings of banks update as Jan 01, 2009: Sr.No Name of Rating Short term Bank Agency 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

Long term AA

Date of rating June-08

Remarks

AA

June-08

AA

June-08

PACRA

A1+

AA

June-08

PACRA

A1+

AA+

June-08

Credit ratings of banks update as Feb 02, 2009: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-08

AA

June-08

AA

June-08

PACRA

A1+

AA

June-08

PACRA

A1+

AA+

June-08

Credit ratings of banks update as March 02, 2009: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al PACRA A1+

AA

June-08

AA

June-08

AA

June-08

PACRA

A1+
28

AA

June-08

Habib Limited MCB

PACRA

A1+

AA+

June-08

Credit ratings of banks update as May 06, 2009: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-08

AA

June-08

AA

June-08

PACRA

A1+

AA

June-08

PACRA

A1+

AA+

June-08

Credit ratings of banks update as July 15, 2009: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-09

AA

June-09

AA

June-09

PACRA

A1+

AA+

June-09

PACRA

A1+

AA+

June-09

Credit ratings of banks update as May 07, 2008: Sr.No Name of Rating Short term Bank Agency 1 Allied PACRA A1+ Bank JCR-VIS A-1+ Limited 2 Askari PACRA A1+ Bank Limited
29

Long term AA AAAA

Date of rating June-07 June-07 June-07

Remarks

Bank Alfalah Limited Bank Al Habib Limited MCB

PACRA

A1+

AA

June-07

PACRA

A1+

AA

June-07

PACRA

A1+

AA+

June-07

Credit ratings of banks update as June 05, 2008: 1 Allied PACRA A1+ Bank JCR-VIS A-1+ Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA AAAA

June-07 June-07 June-07

AA

June-07

PACRA

A1+

AA

June-07

PACRA

A1+

AA+

June-0

Credit ratings of banks update as Aug 15, 2008: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-08

AA

June-08

AA

June-08

PACRA

A1+

AA

June-08

PACRA

A1+

AA+

June-08

Credit ratings of banks update as Dec 20, 2008: 1 Allied PACRA A1+ Bank Limited 2 Askari PACRA A1+ Bank
30

AA

June-08

AA

June-08

Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+ AA June-08

PACRA

A1+

AA

June-08

PACRA

A1+

AA+

June-08

Credit ratings of banks update as March 31, 2007: Sr.No Name of Rating Short term Bank Agency 1 Allied JCR-VIS A-1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

Long term A+

Date of rating Aug-06

Remarks

AA+

June-06

AA

June-06

PACRA

A1+

AA

June-06

PACRA

A1+

AA+

May-06

Credit ratings of banks update as Apr 16, 2007: 1 Allied JCR-VIS A-1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

A+

Aug-06

AA+

June-06

AA

June-06

PACRA

A1+

AA

June-06

PACRA

A1+

AA+

May-06

Credit ratings of banks update as May 02, 2007: 1 Allied JCR-VIS A-1+
31

A+

Aug-06

Bank Limited Askari Bank Limited Bank Alfalah Limited Bank Al Habib Limited MCB

PACRA

A1+

AA+

June-06

PACRA

A1+

AA

June-06

PACRA

A1+

AA

June-06

PACRA

A1+

AA+

May-06

Credit ratings of banks update as July 18, 2007: 1 Allied JCR-VIS A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-07

AA

June-07

AA

June-07

PACRA

A1+

AA

June-07

PACRA

A1+

AA+

June-07

Credit ratings of banks update as Aug 09, 2007: 1 Allied JCR-VIS A1+ Bank Limited 2 Askari PACRA A1+ Bank Limited 3 Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA

June-07

AA

June-07

AA

June-07

PACRA

A1+

AA

June-07

PACRA

A1+

AA+

June-07

32

Credit ratings of banks update as Oct 19, 2007: 1 Allied PACRA A1+ Bank JCR-VIS A-1+ Limited 2 Askari Bank Limited Bank Alfalah Limited Bank Al Habib Limited MCB PACRA A1+

AA AA-

June-07 June-07

AA

June-07

PACRA

A1+

AA

June-07

PACRA

A1+

AA

June-07

5 (PARA)

PACRA

A1+

AA+

June-07

BANKING SECTOR OF PAKISTAN: Economy of Pakistan: Since the independence of Pakistan, economy of the country is primarily agrain. Pakistan is a developing country, having total estimated population of 177 million in 2011. The total labor force is 58.41 million out of which 55.17 million is employed. At the time of independence in 1947, Pakistan was an agrarian economy where the contribution of agriculture toward GDP wad 53% during the year 1950. However, major shifts in the sectoral shares have occurred since then as the shares of agriculture, industry and services towards GDP during year 2011 were 20.9 percent, 25.8 percent, and 53.3 percent respectively. Growth has been slow during a year 1947, the growth rate has been better than the global average during the subsequent five decades, but showed a bit late 1990s. however, Pakistans economy gained its momentum again and grew at an average rate of 7 percent between 2003to 2007 which enables the government to rise development spending. As a result the poverty headcount was reduced by more than 10 percent from 34.5 percent in 2001 to 22.3 percent in 2006. Since the beginning of 2008 Pakistan face security issues stemming from the nations role in the War on Terror have create great instability and led to a decline in FDI from a height of appproimanetly US $5410.2 in 2008 to US $2205.7 Million for the fiscal year 2010. Due to
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current situation foreign investment transfer to Gulf countries. The dual impact has shocked Pakistans economy with gaping trade deficits, high inflation. In 2008 inflation reached as high as 21% and Pakistan had to depend on an aggressive fiscal policy backed by the international monetary fund to avoid possible bankruptcy. The inflation rate of fiscal year 2011 was 14.1%. The average inflation rate between 2007 and 2011 stood at 14.6%. And the GDP growth for 2011-12 has been estimated at 3.7 percent as compared to 3.0 percent in the previous fiscal year 2011. Financial Sector of Pakistan: Financial institutions play a vital function of intermediations between providers of investable funds (depositors, securities holders etc) and the users of such funds (namely businesses). No economy can progress unless its financial sector of facilitates its business activity consistently, and in the case of a developing country like Pakistan, these FIS act as a necessary catalyst for economic growth as well. The State Bank of Pakistan is the central bank of the country, has played two very critical roles with respects to the financial sector. Firstly it ensures soundness of banks and DFIs through prudential oversight with a view to maintain financial stability; secondly it pursues a development objective under which it facilitates financial markets developments and enhancement of access to finance. The banking system of Pakistan has an 88 percent share of the total financial sector, in this banking structure of 38 commercial banks and 4 specialized banks, 24 local private banks, 4 nationalized public sector banks, 6 foreign banks, out 24 private commercial banks 5 are Islamic banks (Pakistan & Golf economist 2010). The share of Non Banking institutions is 12 percent and includes leasing companies, Mudarabas, Insurance companies, investments banks, housing finance companies, and mutual funds. Historical perspective: The current structure of the financial sector in Pakistan is the result of several policy shifts and developments. The eras of financial sector developments in Pakistan can broadly be segregated into 194770, 1971 90 and 1991 to date period. Prior to 1971, the primary focus was on developing commercial banks in the private sector and creating development finance institutions backed by the government. The private sector development, however, almost clogged during the period 19711990, owing to the nationalization policy of the government. During this period, the banking sector came under the governments control. Current Situation: Know here i m discussing key performance figures of the current banking sector. Total assets of the banks is amount Rs.7.7 trillion as end of June 2011. The deposits RS 6.0 trillion, while
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advances and investments of the sector are 3.8 trillion and Rs 2.6 trillion respectively. Profit of the banking sector of year 2010 was Rs 105 billion and for the first six months of 2011 it was RS 77 billion. The banks have a healthy Capital Adequacy Ratio of over 14 percent and have shown steady increase in capital even in absolute terms and equity of the banks is RS 722 billion June 2011. The gross none performing loans which were low in 2007 (7.6%) are now at 15.3% as of June 2011. (Role of financial institution and capital markets in Pakistan economy December 2011)

Empirical Findings: In this section of my theses I will present empirical finding which are based upon financial tools such as ratios implemented on the annual statements of the banks for the year ended 31 December 2011. Sample of my search include 5 local banks of Pakistan. I calculated total eight financial ratios for all 5 banks of my sample that represent six components of CAMELS rating system.

Bank Name Branches Allied Bank Limited Askari Bank Limited Bank al Habib Bank Al Falah MCB 837 245 289 820 860

Total Assets 515,888,612 343,865,720 384,525,614 468,345,788 656,324,807

Total Capital 40,710,370 20,411,442 26,652,267 29,117,254 82,014

Deposits

Advances

Profit

399,560,790 244,439,837 10,256,173 291,499,395 150,712,556 302.097,187 114,863,132 401,245,675 198,468,512 1,705,207 4,537,104 4,325,888

491,146,798 225,794,738 19,302,483

Camel rating Base: There are 6 components of CAMEL rating model. And these are rated on the basis of following criteria on the scale of 1 to 5. Rating 1 shows strong position while rating 5 indicates worst position of the bank in the particular component. And each component has a well throughout scale of rating based on the prevailing financial and economic conditions (Saltzman & Salinger, 1998). Key ratios of CAMELS rating system to evaluate the rating of different banks are: Components Capital Adequacy Ratio Asset Quality Ratio Management ROA ROE Liquidity Ratio 1.1 Liquidity Ratio 1.2 Rating 1 15% 1.25% 25% 1% 22% 0.55 50% Rating 2 12%-14.99% 2.5%-1.26% 30%-26% 0.9%-0.8% 17%-21.99% 0.62-0.56 45%-49.99%
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Rating 3 8%-11.99% 3.5%-2.6% 38%-31% 0.35%-7% 10%-16.99% 0.68-0.63 38%-44.99%

Rating 4 7-7.99% 5.5%-3.6% 45%-39% 0.25%-0.34% 7%-9.9% 0.80-0.69 33%-37.99%

Rating 5 6.99% 5.6% 46% 0.24% 6.99% 0.81 32%

Sensitivity Ratio

25%

30%-26%

37%-31%

42%-38%

43%

Capital Adequacy: The Capital Adequacy shows the financial strength of a bank, and in this financial strength usually show by bank CAR= TIER1 +TIER2/Risk Weighted Assets. This ratio determines the ability of banks to meet with obligation on time and other risks such as operational risk, credit risk, etc. Tire 1 is a type of capital, in simple words we can say own capital which consists primarily of common stock, preferred stock, retain earnings. Tier II is a supplementary form of capital of banks. In this include undisclosed reserves, subordinate term debt, general provision, and resolution reserves (Christopoulous 2011). In Risk weighted assets, according to the credit risk assets are weighted. Bank Name Total Total Risk CAR Ratings Regulatory Weighted a/b*100 Capital Assets Base (b) (a) 34,818,473 5,891,897 40,710,370 303,082,586 13.43% 2 20,411,442 29,117,254 26,652,267 17,984,0957 250,932,783 158,102,911 11.34% 11.60% 16.86% 3 3 1 Tier I Tier II

Allied Bank Askari 149,290,74 5.482,368 Bank Bank 21,639,777 7,474,477 alFalah Bank 17,803,517 8,848,750 al Habib MCB 77,030 4,984

82,014

376,442

21.78%

Assets Quality: Quality of banks assets is related to the left side of the balance sheet. Usually top management of the bank is concerned mostly with quality of the loans they provided to their customers as it provides earnings to their banks. Quality of the assets as its affects both cost to the banks and economies of scale for the bank (Bernstein 1996) assets that have low quality usually have higher possibility to become a non performing loan. Nonperforming loans are usually bad debts that are in default or they are near to be in default. In Pakistan
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those which are in default for more than three months are included in nonperforming loans (Chang 2006) Below is the list of banks in alphabetical order that shows total advances of the banks, their total non-performing assets and provision provided by the banks to cover theses nonperforming loans. Lower asset quality ratio shows higher performance of the bank. (Figures in Rs 000)

Bank Name

Allied Bank Askari Bank Bank alFalah Bank al Habib MCB

Provision Total Non Non Performing Performing Assets Assets 3 2 244,439,837 17,703,717 20,452,465 150,712,556 198,468,512 114,863,132 656,324,807 16,668,690 12,925,864 5,131,178 22,333,442 23,645,541 19,096,614 3,203,630 26,664,873

Advances 1

Asset Quality Ratio% 3-2/1*100 1.12% 4.62% 3.1% 0.65%

Rating

1 4 3 1 1

Management : Below is a table of banks shows the ratio of Management expenses to total earnings, placed in alphabetical order. (Figures in Rs 000) Management Quality Ratio: Banks Name Mgt Exp Total MER% Rating 1 Earnings *100 2 Allied Bank 13,289,101 51,828,897 25.6% 1 Askari Bank 8,787,381 32,768,950 26.8% 2 Bank alFalah 13,880,361 44,166,897 31.4% 3 Bank al Habib 7,621,965 36,529,237 20.8% 1 MCB 15,860,242 68,215,902 23.2% 1

Earning:

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It is necessary for the banks to generate sufficient earning to stay in the market for a longer period of time. To measure earnings the ratio used are Return on assets and Return on equity ROA= Net Profit/Total Assets, this ratio avoids the volatility of earnings linked with usual items, and measures the profitability of the banks. ROE= Net Profit/Own Capital, this ratio shows the efficiency of the bank that how the bank uses its own capital.

Bank Name Allied Bank Askari Bank Bank alFalah Bank al Habib MCB

Total Total Profit ROA% ROE% Rating RATING Assets Equity After Tax 3/1*100 3/2*100 ROA ROE 1 2 3 515,888,612 37,761,572 10,256,173 1.98% 27.16% 1 1 343,865,720 16,585,997 468,345,788 23,126,022 384,525,614 17,878,659 1,705,207 4,325,888 4,537,104 0.49% 0.92% 1.17% 10.28% 18.70% 25.37% 3 3 1 3 2 1

656,324,807 81,034,402 19,302,483

2.94%

23.82%

Liquidity Management: Liquidity is a ability of a firm to convert its financial assets into cash most rapidly or in a quick succession or we can say availability of the funds to pay off all its financial obligations when they become due. Here I am using two ratios: one is Loan to Total Deposits L-1, second is Circulating assets to Total assets L-2. Advances to Deposits: Bank Name Allied Bank Askari Bank Bank alFalah Bank al Habib MCB Advances 1 244,439,837 150,712,556 198,468,512 114,863,132 225,794,738 Deposits 2 399,560790 291,499,395 401,245,675 302,097,187 491,146,798
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Ratio = 0.611 0.051 0.494 0.380 0.459

Rating 2 1 1 1 1

Circulating Assets to Total Assets: Bank Name Circulating Assets 1 Allied Bank 253,310,278 Askari Bank 167,673,293 Bank al Falah 242,721,229 Bank Al Habib 252,807,732 MCB 375,441,108

Total Assets 2 515,888,612 343,865,720 384,525,614 468,345,788 656,324,807

Ratio % *100 49.10% 48.7% 63.12% 53.9% 57.20%

Rating

2 2 1 1 1

Sensitivity to market risk: The ratio we used to measure sensitivity of the sample banks in my thesis research is, Total securities to total assets = Total securities/Total assets. Below is a table of banks showing the ratio of total securities to total assets ratio, placed in alphabetical order. (Figures in Rs 000)

Name of bank Allied Bank Askari Bank Bank al Falah Bank Al Habib MCB

Total Securities 175,789,638 133,655,387 166,648,636 233,105,101 319,005,983

Total Assets 515,888,612 343,865,720 468,345,788 384,525,614 656,324,807

Ratio % 34.0% 38.8% 35.5% 60.6% 48.6%

Rating 3 4 3 5 5

PACRA short term and long term rating 2011: Credit ratings of banks update as July 20, 2011: 1 Allied Bank Limited PACRA A1+ AA 2 Askari Bank Limited 3 Bank Alfalah Limited 4 Bank Al -Habib Limited PACRA PACRA PACRA A1+ AA A1+ AA A1+ AA+
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July-11 June-11 June-11 June-11

5 MCB

PACRA

A1+ AA+

July-11

in this section I calculated ratios of all six components of CAMELS rating system of my 5 sample banks. And to solve these ration I collected the data from annual reports and state bank website and PACRA website. This extensive study of financial reports of the sample banks gives us some practical experience to analyze the financial position of the banks.

Analysis and discussion: In this section of my thesis I will analyze the finding of my search that are presented in the previous section. First I will analyze rating results of each component separately and afterward I will analyze CAMELS composite rating of the banks with respect to the rating assigned to these banks by external credit rating agencies for similarities in the results. I will also rank these banks on the basis of results generated in components rating of every banks. Components rating analysis: Capital Adequacy Rating (CAR): Most sample banks of my research show good CAR and their ratio shows good quality of compliance with the regulatory requirements.MCB, AL-Habib and ABL have a higher CAR and have a good compliance to the regulatory requirements. And Askari and Alfalah have a marginal performance, but very limited chance to failure. Assets Quality Rating: The quality of assets plays a important role in the profitability of the banks. And banks having a large amount of nonperforming assets usually have to provide more provision against these nonperforming loans. In my sample all banks have their nonperforming loans greater than the provision against these loans. Only the Bank Al Habib has its provision against non-performing loans is greater than. According to my finding ABL, Bank Al Habib and MCB have a strong asset quality rating 1, and Bank Alfalah show rating 3 that indicate average quality of assets. Only one bank name Askari Bank has a rating 4, which show poor performance on assets quality. Management Quality Rating:
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In finding of my sample banks management of most banks is performing very well. Reason behind their performance is that the large banks have a large amount of fund and high qualified and best persons are available in the market. In my finding only Bank Alfalh shows a marginal performance in their management quality rating. Earning Quality Rating: Earnings are accumulated with the help of assets and capita. An economy of Pakistan is going through the phase of recovery after the great financial crisis which hits whole world and a massive devastated flood ever in the history of the country, earning of most sectors of the economy are decreased. In my sample ABL, Al Habib, MCB, AlFalah Bank have adequate earnings, only Askari bank shows the unsatisfactory performance in earning rating, but very few chances to failure. Liquidity Management Ratings: Know here I am measuring the Liquidity position of the sample banks. In this regard I am using two formulas that take into consideration advances to deposits and anther circulating assets to total assets. In my finding all banks have a good level of liquidity position and no alarming liquidity concerns for any particular bank. Sensitivity to Market Risk Rating: In my findings two banks MCB and Al Habib have a extreme level of risk associated with the assets and have a component rating of 5, Askari Bank have some concerns regarding their marketable securities and is rating 4 on the component rating.

Banks Ratings on the basis of Camels rating system: Sample Banks Ranking: Bank Name MCB Al-Habib ABL Bank Alfalah Askari Bank Total components Score 12 12 13 19 22 Ranking 1 2 3 4 5

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In this above table all sample banks of my research are ranked on the basis of component soccer attained by every individual bank. Bank that has a lower score is the best in the ranking of the banks. All large banks like MCB, Al-Habib and ABL, show their better performance as compare to small banks. Bank Alfalah has a 4 ranking and Askari bank has a 5 score in the table above. Large banks showed better performance in all components of CAMELS rating system and are rated lower on the individual component ratings and ultimately they have lower total for component ratings and secure ranking on the top of the table. These banks maintain adequate performance and very good risk management practices and has a high level and qualified management that maintains a good level of liquidity. These banks have satisfactory level of CAR and quality of the assets on the right side of their balance sheets. And Bank Alfalah And Askari Bank lower in the ranking, the reason is first of all these banks have a large amount of nonperforming assets and some negative earnings, and inefficient management to take care of the banks assets to be utilized efficiently.

Does credit Rating effect on banks performance? Allied Bank Limited: I am using camel rating system on ABL my finding indicates that ABL have a rating 2 which indicate that it is a fundamentally and financially strong bank. It shows that ABL has a good management that very efficiently looks after its business activities and has a good control over the risk associated with the bank operations. Bank also maintains high level of liquidity as well. On the other and ABL is rated A1+ for its short term rating issued by PACRA which means good level of liquidity in near future and its fulfillment of all its current short term obligations on time. ABL is rated AA on its long term rating which present strong financial position on the bank and timely fulfillment of its commitment of all financial obligations. So I can say that if ABL has not good rating then its performance automatically affected, because PACRA and CAMELS rating system rated the banks after verification of full its financial position. Askari Bank Limited: Askari Bank Limited is assigned a rating 4 which denotes unable and risky performance of the banks. It is mainly because of its management failure to utilize its assets properly and banks end up with un satisfactory earnings. PACRA short term rating is A1+ which indicates good level of short term liquidity where as its long term rating is AA which presents strong financial position of the banks. So we observe that both systems show a different results totally changed results. According to my finding bank show rating 4 which is poor rating because of its performance and if its rating is 2 then automatically its performance is good. Bank Al Falah Limited: Rating assign by CAMELS is 3 to Bank Alfalah, which shows marginal performance of this bank. This rating shows the very low chance to failure. And PACRA shows an A1+ for short
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term and AA for long term rating which present a strong financial position. If bank show a rating 2 or 1 then its performance is automatically effect because good rating shows the good performance of the banks. Bank-Al Habib: Bank Al-Habib is assigned a rating 2 and it is 2nd no in the sample banks. These indicate the bank high level performance and all its departments doing a good job. PACRA assign a A1+ for short term and AA for long term rating that indicate its good performance. Know here our finding show that Bank Al-Habib has a rating 2 so his performance is also good with compare to Askari bank. If it shows a rating 4 then its performance is automatically affected. And CAMELS and PACRA shows a same rating for Al Habib. MCB: MCB is assigned a composite rating of 2 and it is ranked 1st in the sample banks. This indicates that bank has a very high level of performance and all the sections are doing a very good job. MCB assigned A1+ for short term and AA+ for long term rating by PACRA. Which represent a strong financial position? MCB is the no 1 in all the banks and showing a good performance if it showing a not good performance then its rating is also low 1 to 4 and may be 5.

Conclusion: Conclusion of my study based on my theoretical framework, finding and analysis and here I m answer my research question: does credit rating effect on bank performance? In this study I analyzed the performance of 5 sample banks for analyzing the performance of banks. And in these 5 banks MCB at No 1 position ABL is NO 3 position Al-Habib No 2 Position AlFalah at No 4 position and Askari at NO 5 position. I used 6 components of rating that shows the performance of the banks and assigned different ratings to the sample banks that are assigned on their performance and liquidity position and management working. In some

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cases PACRA and CAMELS show a same results and in some cases results are different and totally opposite of each rating system. Through my findings it is proved that credit rating agencies assign the rating of banks on their whole year performance, liquidity position, management role, CAR, and assets quality. If credit rating of bank is low then its sure that its performance is also not good in the year so thats why rating agencies assign a low rating. And if rating of banks is high its mean its overall performance is good so thats why rating agency assigned a good rating with compare to other banks. In simple words if banks performance is good then its rating is also high, and if banks performance is not satisfactory then its rating is also low. And it is proved that banks overall performance is affected on the credit ratings of banks. Recommendations: At the en d of my research I am able to put forward some recommendations to State Bank of Pakistan and Security Exchange Commission of Pakistan. I found disparities in results with CAMELS and PACRA. So I m recommended the usage of CAMELS as a regulator rating system in the context of Pakistan banking industry. We strongly recommend that SBP should try and put some efforts to customize their own regulators supervisory rating system. A rating system that can effectively evaluate the performance of commercial banks and other affiliated financial institutions operating in the local banking industry of Pakistan. If not possible. Security and Exchange Commission of Pakistan is required to critically evaluate procedures of national credit rating agencies such as PACRA and JCR-VIS and bring them to the level of international standard.

References: Ahmed A Malik, MI & HAMAYOUN (2010) Banking development of Pakistan. Allen F & Santomero to Islamic Banking (2010) Christopoulos, AG MyLonakis J & Diktapanidis P (2011) Lal D 2010 the great crash of 2008 Sarker (2005) Trautmann (2006) Pyle (1997)
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Khan (2006) Turnner (2006) Camel Rating (Haseeb Zaman) Performance and credit risk in banking by (Sam Hakimand Simon Neaime) Stability of banking transactions by Pamela. Multiple rating and credit standard by Richard Cantor, Frank Packer. An equilibrium model of credit rating agencies by Steniar Holden, Gisle Jaaners. Asymmatric bench marking in bank credit rating by Chung Hua Shen, Yu Li Hung. Credit rating and complementary sources of credit quality information by Arturo. The credit rating agency by Lawarnce J. white. Who did increased competition after credit rating bt Todd Milbourn. Ratings banks in earning market by Liliana Rojas. Bank credit rating what determine their quality by Harald Hau, Sam Lang Field. Credit rating and bank monitoring ability by Leond I Nakamcra. Credit rating and bank behavior in India by Nachane, DM and Ghosh. Credit rating of banks by N Jonker The integrated impact of credit and interest rate risk on banks by Mathias Drehmann. Credit risk rating at Us Banks by William F Theary. PACRA Rating System www.pacra.com.pk State Bank of Pakistan www.sbp.org.pk Annual report allied bank www.abl.com.pk Annual report Askari bank www.askaribank.com.pk Annual report Alfalah bank www.bankalfalah.com Annual report Bank al Habib www.bankalhabib.com Annual report MCB www.mcb.com.pk www.google.com.pk

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