Using IDC Rankings in CD Purchase Decisions

By Gary Tantleff 

Clients who purchase a certificate of deposit (CD) through UBS Financial Services, Inc., are made aware of the IDC ranking that is calculated for the bank or savings institution. Below, please find an explanation of what that ranking is and how it can be useful in an investment decision.

IDC Ranking
Founded in 1985, IDC’s unique ranking system has become the industry standard for savings institutions that broker CDs.

About IDC Financial Data
IDC compiles financial data on all banks, bank holding companies, thrifts and credit unions reporting to the federal government. Using the quarterly financial statements of conditions, IDC is able to calculate more than 35 key financial ratios and provide a one-number summary rank of quality for more than 17,000 institutions. Since 1985, more than 95 percent of those institutions that failed were ranked below 50 (Lowest Ratios) prior to failure—with the majority ranked One (the absolute lowest rating we assign).

IDC’s ranking system is used by Fannie Mae, Freddie Mac, Ginnie Mae, government regulators and many states and municipalities as a guide for determining potential financial relationships. Individual institutions rely on IDC’s data for evaluating their performance and setting goals to improve quality. Private companies, individual investors and insurance companies, to name a few, also rely on IDC’s timely information.

IDC Rankings
Ranks range from 1 (the lowest) to 300 (the highest) and fall into one of the following six groups (ranks are the opinion of IDC Financial Publishing, Inc.):

Superior (200-300): Financial institutions rated superior are simply the best by all measures. In addition to favorable capital ratios, most consistently generate return on equity (ROE) above cost of equity (COE).

Excellent (165-199): Institutions with an excellent rating are strong institutions. Their ratios reflect quality management both from a balance sheet and income performance standpoint. Operating expenses and costs of funding are under control, producing a healthy ROE.

Average (125-164): Institutions rated average meet industry capital standards. When compared to excellent and superior-rated institutions, most exhibit lower-quality loans and narrower profit margins. A specific problem is a low operating profit margin and/or a large standard deviation in the operating profit margin. The marginal problems of the average financial institution require shifts in policies and practices to raise asset quality or improve profits.

Below Average (75-124): Financial institutions rated below average represent institutions under strain. Average loan delinquency is high. In some institutions, liquidity ratios demonstrate risk. In many, excess high-risk loans or assets are above the loan loss reserve and threaten equity capital. A specific problem is a low operating profit margin and/or a large standard deviation in the operating profit margin. Return on financial leverage is negligible, on average, due to narrow (or negative) leverage spreads. Institutions are also rated below average if they are deemed “adequately capitalized” per FDIC capital definitions and have a high volatility in operating profit margins.

Lowest Ratios (2-74): This lowest ratios group contains some institutions with less than the minimum capital required. In some institutions, liquidity ratios demonstrate risk. In many, increasing loan loss provisions expand net losses on the income statement and, along with the excess of net charge-offs, reduce capital ratios. Again, a specific problem is a low operating profit margin and/or a large standard deviation in the operating profit margin. A high number of failed institutions were rated lowest ratios prior to failure. Financial institutions are also rated among the lowest ratios if they are deemed “under-capitalized” or “significantly under-capitalized” per FDIC capital definitions.

Rank of One (1): Institutions with a rank of one have the highest probability of failure. Loans 90 days past due, non-accrual loans, restructured loans, and other real estate owned, on average, exceed the loan loss reserve and equity capital by a wide margin. Liquidity ratios demonstrate risk. Without major balance sheet improvement, these institutions will fail. Institutions are also given a rank of one if they are deemed “critically under-capitalized” per FDIC capital definitions.

Note: The information contained in this article is based on sources believed reliable, but its accuracy cannot be guaranteed. This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial advisor, as well as your tax and/or legal advisors, regarding your personal circumstances before making investment decisions.

 

Gary Tantleff is the managing director of investments with the Credit Union Advisory Group at UBS. He can be reached at 877.269.1776 or gary.tantleff@ubs.com. Visit ubs.com/team/cuag for more information.

 

Questions? Contact Sales & Marketing Associate Craig Reed: 206.340.4789, creed@nwcua.org.

Posted in Article Post.