Responding to what it calls a growing demand from investors and financial institutions, Standard & Poor's is expanding its ratings on banks in emerging markets.
The New York-based credit rating agency will cover an additional 250 banks over the next few months in markets stretching from Mexico to Indonesia. The move comes as more and more locally based financial institutions gain the means to serve growing economies in their regions.
"Most of these countries are growing more rapidly economically than the developed countries, and the economic activity that flows through the banks is increasing," said Roger Taillon, S&P's managing director responsible for financial institutions outside the United States.
In a first step, S&P has assigned ratings to major banks in Singapore, Indonesia, the Philippines, Mexico, Colombia, and Japanese regional banks. Next year, ratings will be extended to banks in Thailand, Malaysia, Hong Kong, Taiwan, South Korea, Brazil, Argentina, Peru, Turkey, Greece, and Hungary.
Mr. Taillon noted that although many banks in emerging markets are better capitalized and more profitable than U.S. or European banks, they are also subject to greater volatility and hence, greater risk.
"Asset quality can go from good to bad rather quickly," he said. "Overall, their creditworthiness is improving, but it's still subject to sharp reversals."
He also emphasized that banks in emerging markets will play an increasingly important role in the future.
For the first time, the credit rating agency will assign grades comparable to those it uses for banks in developed markets.
Although S&P has assigned such ratings to some banks in emerging markets, it has previously limited most of its assessments to such categories as "strong," "adequate," or "satisfactory."
However, unlike S&P's traditional ratings, which are based on public information combined with the agency's own research, those for banks in emerging markets will be based only on analysis of public information.
To indicate the difference, S&P will attach the subscript "pi" to its normal A- and B-based grading system.
"There is clearly strong capital market interest in the financial institutions located in emerging markets given their needs for development capital," said Leo C. O'Neill, president and chief ratings officer.
He added that the ratings will also benefit banks in emerging markets by "introducing them to a wider universe of capital market participants."
Among the institutions most interested in obtaining more detailed ratings, executives said, were other banks, investment funds, derivative product companies, and industrial companies.
S&P will assign ratings based on its own research and in conjunction with local rating agencies with which it is affiliated in Latin America and Asia.
Four other major credit-rating agencies - IBCA Ltd., Thomson BankWatch, Duff & Phelps, and Fitch Investors Services - all assign ratings to banks in emerging markets to varying degrees according to slightly different criteria.
Thomson BankWatch, Moody's Investors Service, and IBCA have been among the more aggressive in developing such ratings, while Fitch and Duff & Phelps have been more selective. Duff & Phelps has also concentrated mainly on Latin America.