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10 Questions

with Xavier Got
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By Paul Voosen
Staff Writer, The Prague Post
July 11th, 2007 issue

VLADIMÍR WEISS/THE PRAGUE POST
Xavier Got says the Czech Republic ranks below Austria and Portugal in economic and industrial risk.
THE GOT FILE

Job title: Associate director, Financial Services, Standard & Poor's
Nationality: French
Previous position: With S&P 10 years, formerly focused on Western Europe

Credit-rating firms, which evaluate the ability of corporations, banks and even nations to pay back debts, are a hallmark of the modern market. Yet despite their market-shifting influence, these largely private companies are little understood outside the business community. In town to meet and critique the Czech banking system, Xavier Got, an analyst from one of the largest rating firms, Standard & Poor’s, talks to The Prague Post about the new bankruptcy law, the virtues of foreign ownership and why it’s all about debt.
❶ What does it mean to rate a bank’s creditworthiness?
We have a specific view on creditworthiness, and that can be very different from the view of an equity analyst or someone else. We don’t focus on returns or share value. So the rating doesn’t mean everything. It doesn’t indicate quality level, in the sense that a bank is good or bad. You can have banks that are well managed with a low credit rating simply because they manage their financial reserves quite aggressively. At the same time, you have banks with low-risk activities that aren’t performing. Despite that, they can have a high rating. It’s all about debt.
➋ And these ratings climb all the way to sovereign states?
Yes, it goes all the way up to the country level, to governments. Currently, the Czech Republic is an A- in foreign-currency rating — the ability to pay debts held in foreign currencies, euros or dollars — and an A in their local-currency rating. For countries, you can expect the latter rating to be at least equivalent to foreign currency, because sovereign states have some flexibility in using their own currency.
➌ How is the country doing compared with the other countries that entered the European Union in 2004?
The ratings for the Czech Republic have a positive outlook, meaning that they will remain the same or go higher. We see an improving trend in the country’s financial management and control of public finances.
True, the Maastricht criteria [for euro adoption] are relatively far away. But the economy is doing better, diversifying and growing. Individual living conditions are improving. This is a good basis for the state’s finances.
If we look at the 10 countries that joined the EU in 2004, the Czech Republic is in the better half.
➍ How much collaboration with a bank or company is required to get an accurate rating?
To get a correct rating, you need deep cooperation. That means we have access to company management and lots of information that’s not disclosed publicly. All this information is kept strictly confidential. All we publish is the rating, which is an aggregation of this information.
That’s why we’re here in Prague this week. We’re meeting with all the banks we rate and the Czech National Bank. With the individual banks we’ll talk about a number of issues, like strategy, financial management and budget projections. This is our value. The market knows we’ve done our due diligence.
➎ How long after a visit to a bank will you wait to change a rating?
This we don’t disclose, because the ratings are so widely used in financial markets and we want to avoid speculation. As soon as we believe a rating must be changed, it is changed. If I go to a bank tomorrow and I think the rating must be changed, it will be changed by the afternoon. The rating is a living thing and every time we need to change it, we do.
➏ What happens to a bank after its rating is dropped or raised?
For a bank, a change in rating affects spending costs. The rating generally applies to debt the bank is issuing, and therefore if ratings go up, the cost of lending is lower, and if ratings go down, the cost of lending will be higher.
In the Czech Republic, banks still have an excess of deposits compared to loans, meaning the influence of financial markets is relatively low, so their cost of lending would be relatively unaffected.
➐ Are there any Czech banks you can single out as a model?
It’s difficult because our analysis is ad hoc for each institution. We don’t come with a single model and see if they follow that. Each institution has strengths and weaknesses. Take Česká spořitelna. Its strength is a strong retail position in the country, a customer base that offers them a lot of potential for developing their business. Plus, it has a low-risk profile. Those are strengths. For weaknesses, Česká spořitelna still has some room to improve its corporate systems and management structure.
Then take Komerční banka; its situation is different. It’s a niche bank focused on the upper branch of the retail market, with a strong position in corporate. It can derive higher revenues from its customer base, because it’s a more sophisticated clientele with sophisticated needs — which comes at a price. And it has a very efficient structure. On the negative side, it’s the smallest of the large institutions here and it’ll have to strengthen its market position in the long term to stay in the race.
➑ You mentioned you were also meeting with the Czech National Bank. What will you talk with it about?
We’re meeting to specifically talk about regulations. The banking business is highly regulated, and so the quality of the regulator is important to our analysis. We’ll talk about the development of new regulations, like the new bankruptcy law [due to come into effect next year].
The current bankruptcy law is weak and does not benefit banks. It’s a complicated process and then there’s uncertainty on what banks will get at the end of it. Anything that can make the process more reliable will be good, not only in terms of banks’ asset quality but also their capacity and willingness to lend to customers. At this point, they don’t know what will happen when their customer defaults. With the new law, they will be more willing to lend to low-quality customers and open up credit a little bit.
➒ Do you have a way of measuring the banking environments of countries, outside of individual banks?
Last year, we introduced a country risk assessment for the banking industry, used to rank the environment banks work in. It’s an analysis of the economic and industrial risk of specific countries. The Czech Republic is ranked just below some West European countries, like Austria and Portugal, who are one grade above. And the Czech Republic is one grade ahead of Slovakia and two ahead of Poland and Hungary. In our view, it’s the most solid banking system in the region. They’re right at the door. The next step will be to equalize with some of the “old” European countries.
➓ What would the country need to do to make that leap?
It’s more a question of time. The industry risk is good. There is some question of the sophistication of markets, especially in terms of investment products, which will bring additional revenue for the banks. The financial institutions, especially the main ones, have a very solid market position. Their asset quality is good compared to some years ago when we had the financial crisis.
In addition, all the major banks have foreign ownership, which is a key factor in the ratings. If they weren’t owned by foreigner shareholders, the ratings would be lower than they are now. The foreign ownership brings in some technical aspects and broader views of the banks’ problems, plus financial means that these institutions would not have on their own.
Want a top manager to answer our 10 Questions? Send a message to Paul Voosen at pvoosen@praguepost.com


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