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Do You Know Your Banks Credit Rating
10 October 2008

How Safe Is Your Bank Do You Know Your Banks Credit Rating With the stock market continuing to exhibit unprecedented volatility, there has been much discussion in the media about investing in cash instruments such as term deposits and Cash Management Trusts. This update outlines the different cash options available to investors and the key things to watch out for. It is important to remember that historically cash has underperformed all asset classes including equities and property over long term periods. However cash does have a legitimate role in portfolios, for instance risk averse investors or those saving for a short term goal such as a house deposit. The safest way of investing your cash is to buy Treasury securities issued by the Federal government. One year Treasury notes currently pay a rate of interest of approximately 5.25%. They have the highest credit rating because the Federal government owns the printing press. The next option is to invest your money in a Cash Management Trust (CMT). These are managed funds that pool investors' funds into money market (short term) investments and are often rated AAA ; the highest rating possible. The manager of a CMT (for instance Macquarie) holds your money on Trust so that if that manager were to go bankrupt, your money is highly unlikely to be affected. This is very different from giving your money to a bank. The third option is to give your money to a bank in the form of a Savings Account or a Term Deposit. When you deposit cash with a bank you become a creditor of that bank. In the US, the Senate voted on increasing the Federal guarantee of bank savings from $100,000 to $250,000 (AUD $310,000). In the UK, Prime Minister Gordon Brown has announced he will increase the government guarantee of bank deposits from the current £30,000 to £50,000 (AUD $125,000). However, here in Australia, there is no government guarantee given to bank savings accounts and term deposits. If your bank closes its doors, you will have to join the queue to get your money back. Hence before depositing your hard earned cash with your local bank, it is essential to know how safe this bank is. So how can you know how safe your bank is? There are two companies dedicated to figuring out exactly this question. Standard & Poor's and Moody's publish credit ratings on all the major Australian banks. A credit rating is a measure of how likely you are to get your money back when you ask for it. The Federal government carries the highest rating of AAA (from S&P) and Aaa (from Moodys). The lower the credit rating, the more risky the bank. The S&P rating scale is as follows;

AAA ; the safest rating
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+ ; generally referred to as a 'speculative investment'

The Big 4 banks in Australia (Westpac, NAB, ANZ and CBA) are all rated AA. This is a very high credit rating and indicates that the probability of default is very low. In fact, only 18 banks around the world carry such a high credit rating. However, some popular Australian banks carry lower credit ratings. For example, Suncorp Metway is rated A+ (two grades lower than AA), Macquarie carries an A- rating and both Bank of Queensland, Bendigo and Adelaide Bank are rated BBB+. The golden rule in investing is that the more risk you take on, the higher your returns need to be to compensate you for this extra risk. Hence when placing your money with a bank, make sure you know the credit rating of this bank and the deposit rates on offer. The lower the credit rating, the higher the rates need to be. This article was written by James Dunlop (j.dunlop@stanfordbrown.com.au) James Dunlop is a financial adviser with Stanford Brown and an Authorised Representative of Genesys Wealth Advisers. Stanford Brown is a Member Firm and Corporate Authorised Representative of Genesys Wealth Advisers Ltd AFSL No.232686 Any advice contained in this article is general advice only and does not take into consideration the reader's personal circumstances. Any reference to the reader's actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the product Disclosure Statement. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

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