Large universal banks lag behind in new quality ratings

14 March 2016

Annual reports key to analysis

A new service from Lafferty Group uses an innovative and radically different approach to determine quality and excellence in banking globally.  The initial results, published in Lafferty Bank Quality Ratings (LBQR), show that ‘too big to fail’ universal banks continue to struggle worldwide.

Using quantitative and qualitative criteria and looking at areas such as strategy, culture, customer care, brand promise and financial performance, Lafferty Group uses the banks’ annual reports to arrive at a quality rating (from one to five stars) for each of 100 financial institutions in 28 countries.

So who fares well and why is this an appropriate methodology?

Different banking models in different parts of the world rank well in the ratings, evidence that there is no one ideal model for a bank – whether it is based in emerging or developed markets.  The 15 institutions receiving the highest Lafferty ratings among the 100 banks from around the world rated in the first issue of LBQR include:

  • Capitec and Barclays Africa from South Africa
  • HDFC from India
  • Discover from the US
  • Public Bank and Hong Leong from Malaysia
  • OCBC from Singapore
  • TSB from the UK
  • Swedbank and Handelsbanken from Sweden
  • National Bank of Kuwait
  • ADIB from the UAE, and
  • Sterling Bank from Nigeria
  • Arab National Bank from Saudi Arabia
  • BCA from Indonesia

Major UK, US, German, French, Spanish, Swiss, Australian, Chinese, Japanese, and Canadian banks typically have 3-star or 2-star Lafferty quality ratings.

Michael Lafferty explained that LBQR uses the annual report because of its unique status.  It is the primary vehicle used by bank management to communicate and account to shareholders and other stakeholders.  He explained “The methodology is founded on extensive conversations with senior bankers, regulators and shareholders and can be viewed as an antidote to excessive focus on traditional measures such as ROE (return on equity) or EPS (earnings per share) favoured by securities analysts. ROE can easily be manipulated. Before the financial crisis traditional bank valuation ratios failed to highlight banks that were overtrading. Like the Max Plank Institute in Berlin and many central bankers we think that simple rules of thumb are often more useful for judging banks”,

Mr Lafferty also stressed that banks that score well on Lafferty Bank Quality Ratings tended to trade at a premium price to their tangible book value,  He said “There is evidence that investors appreciate and will pay for quality.  Our ratings explain what the stock market is rewarding and why.”

So what next?  It is anticipated that at least 400 banks will be rated in the first year and ratings will be updated as banks publish new annual reports.

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