1、45123543215Credit Risk ManagementEnhancing Your Bottom LineEbrahim ShabudinManaging Director Deloitte&Touche LLPThe AFP 23rd Annual Conference New OrleansNovember 3-6,2002Credit Background Thorough identification and accurate measurement of credit risk,supported by strong risk management can help im
2、prove the bottom line.An uncertain and volatile economic environment significantly impacts this ability.The desire to grow and turn in outstanding results has a tendency to put pressure on the checks and balances within businessesValue PropositionCredit plays a critical role in“selling”products and
3、services Expands revenue opportunities with creditworthy,incremental customers Utilizes innovative structures to support business relationshipsEffective credit risk management limits credit losses and provides stable cash flows and earnings Marketplace rewards companies exhibiting earnings and cash
4、flow stability with higher P/E multiples Marketplace penalizes credit induced volatility and“surprises”Raises questions about quality of managementCorporate Credit Risk Companies are exposed to significant levels of credit risk emanating from different sources Accounts Receivables Other Notes Receiv
5、ables Buyer and Franchise Financing With Recourse Financing Project Finance Structured Transactions Leases with Recourse Derivatives Exposures FX,Interest Rate Risk,Commodities etc.Collateral Risk Parent or Third Party Guarantees Commercial and Standby Letters of Credit Note also that Critical Suppl
6、iers to the company may pose specific credit riskDSO Impact an exampleCredit as a Facilitator Credit risk management is important Credit is a facilitator of business growth and performance High business margins tend to attract lower quality clients and therefore higher risk profile to manage Clients
7、(buyers)may be concentrated in selected industries and provide limited portfolio diversification opportunity Poor credit risk management resulting in negative impact to bottom-line is heavily penalized by marketsCredit Strategy&Risk ToleranceuSpecific Quantifiable ObjectivesuManagement Review Method
8、ologyCredit Objectives and Risk TolerancesCredit PoliciesCredit Risk Management ProcessesImprove ProfitabilityReportingCredit Strategy/PlanCommon PerformanceMetricsuCredit Strategy Statement and Risk ToleranceuCoordination with Business PlanThe business strategies and objectives drive the establishm
9、ent of creditpolicies and procedures.Measurement and reporting as well as the use of current technologies enhance credit decision-making and improve risk management.The entire process is continually re-evaluated and improved.Credit Risk Areas to ConsiderCredit PolicyCredit Approval AuthorityLimit Se
10、ttingPricing Terms and ConditionsDocumentation:Contracts and CovenantsCollateral and SecurityCollections,Delinquencies and WorkoutsExposure Management Aggregation ControlPeriodic Account Reviews Payments/Aging Credit ConditionCompliance with Covenants,TermsTechnology/Reports Transactions/Bookings Ri
11、sk-adjusted ReturnOrigination/AssessmentAdministrationMonitoring/ControlRiskManagementValue CreationBusiness Performance MeasuresOrganizations need a rigorous set of measures to support continuous improvementPerformance-based management utilizes metrics that measure actual performance against predet
12、ermined thresholds.The thresholds are established taking into account the organizations strategy,operatingenvironment and process controls.The measures drive value creation and should support problem identification and correction.nBusiness StrategySystemsOperationsFinancePerformance ManagementSales
13、channelsContracts&DocumentationCredit analysisCredit limitPricing&termsCredit AnalysisCredit DecisionsCollectionsCREDIT POLICYCollateral acceptancePortfolio managementFinancial analysisDisposal/Risk mitigationCollateral managementCustomer managementExposure measurementManagement reportingExposure ag
14、gregationRecoveriesCredit scoringRisk ratingRISK MANAGEMENTCredit Risk Managements Inter-related ActivitiesComplianceOriginationReportingTransactionsCredit Policies&Procedures Analysis&RiskManagementGovernance,Controland ImplementationMeasurementMethodologiesTechnology&Data IntegrityCredit Strategy&
15、Risk ToleranceA complete and coherent risk management framework contains the following elementsCredit Risk ManagementReassessment Credit Strategy&Risk ToleranceA New Paradigm A new business paradigm had evolved:causing a lack of reliance on good fundamental analysis The idea that stock market values
16、 would continue to go up indefinitely Increasingly competitive,complex and volatile market place Higher than expected actual debt burdens Extensive reliance on unrealistic future cash flows Failures in corporate governance Questionable personal and corporate ethicsImplications for Corporate Governan
17、ce Current organization structures to be revisited Clarity around roles and responsibilities Need for honesty,integrity and independence(self-regulation)Technical expertise of people and strong management processes Improved disclosure requirements Importance and implementation of sanctions Increased
18、 legislation and compliance requirementsRisk Identification,Origination,Credit Administration,etc.Risk Identification,Transaction Structuring,Approval&Pricing Decisions,Reserving,etc.Portfolio Risk Concentration,Risk Based Limits,etc.Pricing decisions,Performance measurement,business and customer se
19、gmentation,compensation,etc.A business model view of Credit Risk Infrastructure componentsCredit Risk Management Strategic VisionDevelopment Stages Foundation Stage includes application of risk identification methodologies,risk scoring or rating systems and strong underwriting standards Basic Stage
20、tends to include managing on a transactional basis by evaluating specific attributes such as structuring,collateral and pricing Advanced Stage represents managing on a portfolio basis including aspects such as concentrations,correlations and diversification The Sophisticated Stage includes applicati
21、on of highly developed measurement techniques for transactions and portfolios,supported by decision-making relating to segments or businesses against established hurdle rates.Credit Risk ClarifiedBusinesses have to contend with Expected and Unexpected LossesExpected Losses Anticipated Cost of doing
22、business Charged to provisions Captured in pricing Relatively easier to measureAssessing expected loss includes determining exposure,default probability and severityUnexpected Losses Unanticipated but inevitable Must be planned for Covered by reserves Allocated to businesses Difficult to measureAsse
23、ssing unexpected loss requires making qualitative judgments around potential volatility of average lossesCredit Risk Management Explained Although credit risk may be difficult to measure it is important to estimate and manage What does Credit Risk Management mean?It represents an institutions abilit
24、y to properly identify and evaluate the potential risk of default in payment of obligations of customers It incorporates the firms ability to effectively manage and control this exposure in a way that is consistent with the institutions business strategy,risk appetite and credit cultureImportant Bui
25、lding Blocks Effective Credit Risk Management requires Clear origination and underwriting standards A strong corporate and credit culture Highly developed risk measurement techniques Ability to recognize and cover expected and unexpected losses Pricing commensurate with risks undertaken Methodologie
26、s to assess net profit contributions by customers and appropriate business segments Proper allocation of capital and management resources In order to:Improve overall corporate performance,measured by a higher EPS or P/E ratio(or market value)Credit Policy and Process Credit Policy should be clear an
27、d concise Credit Underwriting Standards must be developed and included in policy Credit Processes should be reasonable and allow quick response to clients Healthy balance between sales and credit approval should exist and be respectedRisk Monitoring Exposure must be complete and current Regular repo
28、rting and updating of clients payment performance Minimum annual reviews of clients should be performed Financial conditions should be regularly assessed Required action must be initiated and follow up must take placeContract Terms and Documentation Contract negotiations must take place at the right
29、 level in the organization Appropriate approvals must be obtained Internal or external legal departments must document completely Terms and conditions should be understood and compliance mechanism put in place Exceptions must be reported and managed urgently to resolutionRisk Rating System Effective
30、nessCredit Scoring is generally used to“risk rate”homogeneous portfoliosHighest applicability is in consumer and retail portfoliosSome advanced scoring systems are being migrated for use in rating“middle market”clientsSuch models are only as good as the underlying assumptionsInternal credit rating s
31、ystems are difficult to assess and are often not independently validatedClient relationship may interfere with objective assessment of risksRating criteria usually a matter of practice rather than written policyRatings are not consistent over timeQualitative credit assessments often lag current mark
32、et informationInstitutions often assume a mapping with external ratings in order to quantify credit riskEffective Risk Rating Systems Sufficient granularity of risk rating categories Accurate and timely assignment of ratings Clear and consistent application of default definition Periodic calibration
33、,triangulation and validation of risk ratings Accurate identification of migration of transactions and portfolios(as reflected by upgrades and downgrades in ratings)Credit Evaluation:Financial Factors Get the information you need to make a full analysis Some information will need to be cross-checked
34、 and obtained on a regular and timely basis Be constructively cynical:new business models are difficult to pull off Be cognizant of delaying tactics Numbers dont tell the whole story!Credit Evaluation:Qualitative Factors Evaluation of subjective factors is often times more important than the numeric
35、al analysis People make a business:visions,values and strategies are only words unless people implement them Management,industry,product,geography,competition etc.all influence results and must be properly assessed Analysis-paralysis may lead to wrong decisionsArt and Science of Judgment Getting acc
36、ess to the best clients and all the relevant information is a challenge Ensuring proper analysis is done requires a strong corporate culture Utilizing qualified resources both internally and externally enhances the results Often the lack of the will to act is what causes high lossesConcluding Commen
37、ts Companies that measure and manage credit risk in a pro-active manner will benefit from a favorable risk profile resulting in Higher revenue Lower losses Improved efficiencies Higher EPS,P/E ratios and market valuesConcluding CommentsRisk Assessment and Limit ManagementCredit Infrastructure and Po
38、rtfolio ManagementCredit Analytics SupportCredit Technology Enablement Credit Quality Credit Underwriting Risk Rating System Effectiveness Counterparty and Portfolio Limits Organizational Structure Policies and Procedures Technology Selection and Implementation Problem Asset Management Risk Rating C
39、alibration Transaction Pricing,Structure and Support Default Probability and Recovery Calibration Credit Reserve Methodology Risk Based Pricing Models Risk Adjusted Return Analysis Portfolio Value Measurement Credit Risk Measurement Credit Performance ScorecardsAppendix:Business Proposal Checklist B
40、usiness Proposal Summary Customer,Rating,Legal Status,Line of Business Guarantor,if anysame Collateral,if anytrue value explained Other Support,if any.Legal or moral only The Transactionrisks and mitigation Amount,purpose,terms and conditions Sources of repayment clearly identified Client payment hi
41、story and relationshipAppendix:Business Proposal Checklist Rationale and Analysis Customer,Guarantor,Collateral,Support Facility Description Amount,purpose,tenor,pricing,terms,conditions,covenants,restrictions etc.Consider affect on above e.g.new leverage Facility Rating?Repayment Capacity Future ca
42、sh flow,conversion of assets etc.Consistency with Credit Strategy and Policy Confirm,and identify any exceptions to policy,underwriting standards,or process Risk adjusted return acceptability Appendix:Business Proposal Checklist Client Relationship Business strategy:increase,maintain or decrease exp
43、osure or exit relationship Consider relation to rating,latest risk profile and payment performance Customer profitability:risk adjusted return,revenue,fees,direct and allocated costs etc.Any conflicts of interest or special concernsAppendix:Business Proposal Checklist Macro Analysis Business Environ
44、ment Review Customers competitive market position and future industry prospects:size,cycle,volatility,new entrants Strength of customers business and financial strategies Management Evaluation:competency,experience and effectivenessAppendix:Business Proposal Checklist Customer Analysis Company histo
45、ry,background,objectives and performance Relevance and strength of future business plans Consider seasonality and scenario analysis Primary and secondary sources of repayment Historical financial capacity and analysis of future performance:sales,profitability,working capital,liquidity,cash flow,leve
46、rage,tangible net worth etc.Quality of earnings Absolute and ratio analysis Peer comparisonsAppendix:Business Proposal Checklist Strengths,Weaknesses and Recommendation Key factors that could jeopardize collection:environment or company specific Any mitigating factors Consider probability and impact Consider all sources of repayment:primary,secondary and tertiary,including access to capital markets,refinancing etc.Summarize strengths and weaknesses and conclude with a recommendation
