Effective
Credit Risk Analysis
Karen Scerri
Risk Management
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Agenda
Origination Channels
Basic Lending Principles
Credit Risk Analysis
Ongoing Monitoring
Origination Channels
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Origination Channels
Branch Level: personal customers, sole traders,
micro enterprises
Business Centres: SMEs
Corporate Finance: SMEs and few Corporate
Customers
Higher sanctioning authorities: Credit Committee
and Board of Directors
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Lending policies
Lending is governed by the Credit
Policies:
Business
Home Loans
Personal Loans and Credit Cards
Trade Finance
E-Commerce
Policies are updated regularly in line with
feedback from the front-liners
Basic Lending Principles
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‘Know Your Customer’ Principle
Character
Ability to Repay
Margin
Purpose
Amount
Repayment
Insurance
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General principles
Detailed assessment of risk profile of the customer /
transaction :
Credit assessment of the borrower’s industry, and
macro economic factors
The track record / repayment history of borrower
History of financial performance of the borrower
The purpose of the credit and source of repayment
The amount of contribution of customer towards the
project
Adequate risk - reward
The proposed terms and conditions and covenants
Adequacy and enforceability of security
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Documentation requirements
Important Information:
History of the business
Management set-up
2-3 yrs audited financial statements including cash flows
Business plan/strategy
Cash flow forecasts
Amount and number of financial obligations
Details on creditors and debtors and underlying key
arrangements
Banking transaction history
Information/background on key individuals in the
business - due diligence where necessary
Statement of Affairs of any proposed guarantors
Credit Risk Analysis
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“Risk comes from not knowing
what you're doing”
Warren Buffett, American Investment Entrepreneur
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What is credit risk?
The loss due to the possibility that an issuer of a financial
obligation will be unable to repay interest & principal on a timely
basis (i.e. default)
Exposure
Economic
sector
Geographic
distribution
Loss given
default
Maturity
CREDIT
RISK
Concentration
Probability
of loss
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Analytic Process
Purpose
Repayment
Feasibility
Type of
borrower
Cashflows over
time
Macro
considerations
Exposure
Profile
Purpose of
financing
Sale of assets
Management
Ranking
Refinancing
Business Risk
Mitigants
External Support
Financial Risk
Pricing
Risks
Exposure
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Analytic Process
Purpose
Repayment
Feasibility
Type of
borrower
Cashflows over
time
Macro
considerations
Exposure
Profile
Purpose of
financing
Sale of assets
Management
Ranking
Refinancing
Business Risk
Mitigants
External Support
Financial Risk
Pricing
Risks
Exposure
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Purpose
What is the purpose of the funding and the
impact on risk?
Acquisition of another business
Change in focus/strategy?
Do the operations complement existing business?
Are shareholders knowledgeable enough in the
area?
Purchase of assets
Upgrade of existing equipment?
New capacity? Is there demand in the market?
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Analytic Process
Purpose
Repayment
Feasibility
Type of
borrower
Cashflows over
time
Macro
considerations
Exposure
Profile
Purpose of
financing
Sale of assets
Management
Ranking
Refinancing
Business Risk
Mitigants
External Support
Financial Risk
Pricing
Risks
Exposure
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Repayment Feasibility
What is the expected source of repayment?
Is there a secondary source of repayment if
the first does not materialise?
Issues to consider:
Cash flows of the business – are these sufficient?
Sale of assets – Are values correct? Is there a
market for the assets?
Refinancing – is the company capable of issuing
debt or equity?
Support/rescue – Does the third party have the
capacity to support the entity?
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Analytic Process
Purpose
Repayment
Feasibility
Type of
borrower
Cashflows over
time
Macro
considerations
Exposure
Profile
Purpose of
financing
Sale of assets
Management
Ranking
Refinancing
Business Risk
Mitigants
External Support
Financial Risk
Pricing
Risks
Exposure
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Risks
Macro
Considerations
Environment
Industry/Sector
Critical Success
Factors
Economic Issues
Industry Structure
and Players
Key Financial
Drivers
Growth Dynamics
and Potential
Main Industry Risks
Social
Issues/Political
Risks
Licensing/Tax/
Regulations/
Incentives
Technological
Issues
Competitive Forces
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Financial and Non-Financial Drivers
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Risks
Management and Ownership
Ownership
Management
Type
Strategy
Influence
Skills
Support
Systems
Control
Structure
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Risks
Business Risk
Business Strategy
Geographical/
Divisional
Positioning
Growth Strategy
Earning Dynamics
Asset Management
Cash Flow from Profits
Cash Flow from Assets
Quality of Earnings
and Cash Flow
from Operations
Business Cycle
(asset conversion
cycle)
Asset Management
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Business Cycle
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Risks
Financial Risk
Funding Strategy
Expected
Financial Risk
vs Business
Risk
Management &
Ownership
Goals
Liquidity
Solvency
Net cash
position
Financial risk
Access to
finance/
capital
Debt Service
Capability
Liquidity of
assets
Off B/S
Liabilities
Funding
Instruments
Tenor/currency
matching
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Analytic Process
Purpose
Repayment
Feasibility
Type of
borrower
Cashflows over
time
Macro
considerations
Exposure
Profile
Purpose of
financing
Sale of assets
Management
Ranking
Refinancing
Business Risk
Mitigants
External Support
Financial Risk
Pricing
Risks
Exposure
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Exposure Structure
Exposure
Exposure Profile
Ranking
Amount
Legal
Currency
Structural
Term
Drawdown
Mitigants
Protect
Repayment
Sources
Influence
Strategy
Signal
Deterioration
Repayment
Monitor
Performance
Pricing
Risk/return
trade-off
External
benchmarks
Ongoing Monitoring
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Periodic Reviews
Ongoing Credit Analysis generally on an annual
basis : (financial analysis, material developments,
feasibility of repayments, conduct of facilities, state
of security )
Identification of Possible Emerging Problems
Increased focus on Bullet Loans
Procedures for Restructuring of Facilities
Last Resort – Transfer to Rehab/Recoveries
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Credit risk assessment
Monitoring and Hindsight Overviews
All credit exposures are regularly reviewed for objective
evidence of impairment, either individually or collectively for
early recovery action.
Hindsight reviews are carried out to:
• strengthen the credit decision-making process. The initial
judgement is reviewed for compliance with Group policies.
• assess the impact of periodically increased empowerment
and sanctioning limits (to the front line management) on
the quality of the loan book.
Monitoring corporate clients whose repayments are in arrears
so that remedial action can be defined and taken
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Question Time
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Thank You