Commercial Banking , Credit Rating & Emerging Countries

With the problems in the Euro Crisis , and the spread of the contagion to other AAA rates countries in the Euro region, one thing comes to mind. Who gets really affected by the change in a country's credit rating ? Well you guessed it right BANKS. 

With the recent downgrades in the credit ratings of countries , the biggest impact that has been observed is a subsequent downgrade in the credit ratings of the banks in the same country. Which explains a really important fact. A Banks credit rating is highly dependant on its home country's ratings. 

Why would credit ratings be important to a bank ? Obvious reason is a better credit ratings, leads to lesser interest cost and higher earnings. But it is not as simple as it seems in the world of Banking. Lending money is a commodity business, the only way a competitor can get advantage over the other is by producing (i.e getting money) at a cheaper rates, given Net Interest Margin ( Net Interest Earned- Net Interest Expense) remains the same for each bank.

Now to compete at a Global Scale the only banks that can be really competitive are the banks with a AAA credit rating , which has a lot to do with the credit rating of the Country. Recent Financial and Euro region crisis, has had an impact on many of these things and made developed banks if not now in the longer term less competitive at the global scale if not fully dysfunctional in some extreme cases ( Banks in Greece, Portugal , Spain and Italy)

How does credit ratings relate to Emerging Markets ? Much of the last decade has seen an improvement in any of the emerging markets, especially in growth , their debt servicing capacity, Debt to GDP ratio, exports etc. 

In light of all these positive factors , and a simultaneous deterioration in the developed worlds credit rating opens up a significant opportunity for the developing markets and countries around the world that has a high possibility of leading to improvements in credit ratings. 

What impact can this have for the Banks in Developing Markets one may ask ? For one it makes them competitive at a Global Scale , Increase in business and increase in Balance sheets as well as increase in earnings. 

In this dynamic world, many opportunities do exist for the emerging markets. It is upto them to prove and grab their opportunity in this changed world.But, if things work right, many countries , and banks would and can benefit from a better credit ratings on a global level.