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. Credit unions, building societies and finance companies are also required to have an approved rating although some smaller institutions may be exempt.
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 Financial Markets Authority website.
To find out about your personal credit history and how to check it, visit the Repayment problems page in our Managing debt section.
