The update of the Financial Institutions Rating Methodology increases the granularity and transparency of the correspondence we establish between key credit risk drivers and corresponding rating levels (‘initial rating mapping’). We introduce peer-based refinements related to the assessment of operating environment and business model. The result is a 10x10 notch specific initial mapping table, which allows for greater credit differentiation.

As a result of the above notch-specific mapping, our Long-Term Sustainability Assessment can lead to a Positive (+1), Neutral (0) or Negative (up to -2) rating adjustment, as opposed to determining the notch specification from a rating mapping split. This improvement increases the transparency on how ESG factors and digital transformation impact the rating.

Scope has also clarified conditions that could lead concentrated exposure to sovereign risk to result in a rating constraint under its Earnings and Risk Exposure qualifier. These conditions include a relative risk assessment and materiality threshold (25% of Tier 1 capital). Scope maintains its long-held view that for some financial institutions, and in particular those benefiting from effective supra-national support frameworks, such as banks in the euro area, there is no valid reason to apply mechanistic rating caps at the level of the domestic sovereign rating. This reflects the view that there is a range of scenarios where banks may go through a sovereign default event without defaulting on their senior obligations.

Finally the update clarifies the conditions under which Scope may differentiate foreign currency and local currency ratings. This could be the case for countries with a sovereign credit quality of BB+ and below (non-investment grade), where transfer and convertibility risk may be material. Scope maintains its view this is not the case for countries in the euro area.

Scope anticipates that the changes to the methodology could impact one rating positively by up to one notch.

Download the updated methodology here or on www.scoperatings.com.