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Credit ratings

A credit rating is an independent assessment of whether an institution can meet its financial obligations. This includes whether they are likely to be able to pay back the money they owe to investors, on time and in full. Credit ratings are useful as a relative indication of the risk of investing in one institution over another.

All banks registered in New Zealand are required to have a rating from an approved rating agency, and new legislation also requires credit unions, building societies and finance companies to have an approved rating by 1 March 2010.

The approved credit rating agencies for banks are Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. The ratings they give to institutions all look a bit like the old school grades, but they are very different – as this table shows. There is a huge gap between an A rating (1 in 150 probability of default) and a B rating (1 in 5 probability of default).

Standardised ratings scale

 

  Description Standard & Poor's scale Moody's scale Fitch scale Approx. probability of default over 5 years*
Capacity to make timely payment Extremely strong AAA Aaa AAA 1 in 600
Very strong AA Aa AA 1 in 300
Strong A A A 1 in 150
Adequate BBB Baa BBB 1 in 30
Vulnerability to non payment Less vulnerable BB Ba BB 1 in 10
More vulnerable B B B 1 in 5
Currently vulnerable CCC   CCC  
    Caa   1 in 2
Currently highly vulnerable CC   CC  
Default D C D  

 

*The approximate, median likelihood that an investor will not receive repayment on a five-year investment on time and in full based upon historical default rates published by each agency.

Source: Reserve Bank

Investment grade ratings

The term “investment grade” is sometimes used to describe an investment with a certain credit rating. This generally refers to a rating of BBB (Standard & Poor’s and Fitch) or Baa (Moody’s) or better.  However it is up to the individual investor to decide what level of credit risk to take on and what level of return to demand for that risk.

A strong rating is not a guarantee that an institution is more likely to survive than a weakly rated one.  Even a triple A-rated organisation could default in the future.

More information

You can find out more about credit ratings in the Reserve Bank bulletin 'A User’s Guide to Credit Ratings’ (PDF, 76KB). There's also helpful information on the Securities Commission's  Look Learn Invest website.

To find out about your personal credit history and how to check it, visit the Repayment problems page in our Managing debt section.

 

Glossary: risk
An investment is normally considered to be risky if there is a reasonable chance that its value will vary significantly in the future. For example, an investment in shares is more risky than an investment in a bank term deposit. The value of shares may fall below the price paid for them while the value of bank deposits generally do not. High risk investments should only be taken on with long term intentions. You would expect a high long-term return to compensate for high risk.
Glossary: investment
A way to use your money to make it grow.