The different solvency ratings
Banks have developed a complex system of ratings to determine the solvency of a company. An overview of these classifications is given below.
For a long time, banks simply divided risk into good and bad risks. After the painful wake-up call of stock-market and real-estate speculation phases, financial institutions have now developed detailed lists of evaluation criteria—lists they continue to fine-tune.
UBS rating system compared with that of Standard & Poor’s and Moody’s:
Credit Suisse uses a customer rating for Switzerland divided into 19 categories. It can be compared to the categories used by the Standard & Poor's and Moody's rating agencies:
It is important to stress that this is the best approximation possible, as the categories overlap.
The decision criteria are similar across all the banks. The following factors influence the rating:
- Financing potential
What is the ratio between debt and cash flow? In what timeframe will the company be able to repay the loan? What amount can be allocated to the payment of interest and the repayment of the borrowed capital?
- Productivity and profitability
What is the ratio between turnover and financial commitments? How much is the return on investment?
What is the amount of readily realizable assets compared to the short-term bank debt?
- Financing ratio
What is the ratio between equity and liabilities?
- Corporate management
How is the managerial structure organized? How are tasks allocated within the management structure?
What is the proportion of non-operating investments (e.g. luxury cars, design furniture) compared to operating investments (e.g. computers, machines)?
- Budget planning
How is the budget drawn up and to what extent do the actual figures correspond to the forecast figures?
- External factors
How does the company manage external parameters such as the environment, market liberalization and the EU?
Is the company temporarily subject to the influence of unusual factors?
Does the company have atypical structures?
Factors linked to the business sector
- Economic context
What are the economic trends affecting the branch?
However, a rating so determined is not engraved in stone. Banks generally carry out a solvency analysis each year. With detailed and transparent information, it is possible to positively influence a rating with:
- specific business plans containing detailed and comprehensible results
- presentation of pending projects
- outline of current and future trends of the company
- strategic outline indicating plans to succeed on the market in the medium and long term