Credit Rating Strategies: A Study of GCC Banks

Abstract

Identifying financial strategies, which help a bank to survive a crisis, is the main purpose of the article. Low oil prices and the COVID-19 pandemic is the latest crisis being faced by the Gulf Cooperation Council (GCC) banks. This article examines the financial strategies of those banks that managed to retain good credit ratings both before and after the global financial crisis, so as to throw light on the characteristics of banks that managed to remain steady and stable. This article analyzes the Fitch credit ratings of 51 Islamic and conventional banks, operating in the GCC, divided into pre–global financial crisis (2002–2007) and post–global financial crisis (2008–2013) periods. Trend and behavior of average ratios of top-rated banks in both the periods is first attempted before moving to the “Ordered Choice Logit” regression method to further analyze the data. Regression results indicate that size and cost management are very important factors in ratings both before and after the financial crisis. As long as asset quality is under control, liquidity is the focal point in achieving good ratings. Top-rated Islamic banks seem to be following a strategy of allowing capital ratios to trend down during a crisis as long as capital is well above the regulatory requirements. The article is the first of its kind, which examines credit rating strategies of GCC Islamic banks and conventional banks. The findings of the article are useful for banks as they throw light on appropriate strategies to be adopted by banks during crises.