A Decision Model Proposal for Credit Risk Rating of Companies

Gökhan GENCER

Introduction

Loans are a key element in economy

Loans are risky

Analyzing risk is essential

To analyze the risk a method is required

Methods are controversial

Scope

Non-bank & Non-financial firms

Small to Medium Enterprises & Corporate Enterprises

Probability of Default as defined on BASEL II Accord

Probability of default

Exposure at default

Loss given default

Importance weight of each criterion

Original Criteria Derived From the Literature

Return on Assets

Return on Equity

Net Profit Margin

Deadline of Receivable

Deadline of Payables

Assets Turnover

Acid Liquidity

Market Share

Firm Size

Cash Liquidity

Current Liabilities to Working Capital

Solvency Ratio

Leverage Ratio

Financial Expenses Coverage

Efficiency

Cash Conversion Cycle

Original Criteria Derived From the Literature

Macro-Strategic Capability

Decision Making Ability

Organizational Capability

Level of Standardization

Corporate Brand Recognition

Coordination Capacity

Relationship with Government

Relationship with Financial Sector

Tangible Collateral

Growth Opportunities

Experts

Experts’ advised the following to be added:

Buyer/Seller Concentration

Quality of Other Creditors

Gearing Ratio

Liabilities to Sales Ratio

Current Ratio

Competitive Analysis

Foreign Currency Risk

Market Diversification

Age of the Company

Track Record

Successor Risk

Sector’s Properties

Sector Diversification

Sector’s Position and Direction

Decision Makers’ Advices About Criteria

The Decision Makers’ advised following to be removed:

Assets Turnover

Growth Opportunities

Solvency Ratio

Decision makers advised to add

Quality of auditing

Priority in the business group

as a factor of Corporate Governance.

Decision Makers’ Advices About Criteria

The Decision Makers’ advised to divide

Relationship with Government

into

Reputational Risk and Morality

Country Based Risk

Decision makers advised to change

Relationship with Financial Sector as

Quality of Other Creditors

Cash Conversion Cycle as

Stock Cycling Rate

Hierarchic Model

Survey

Pairwise Comparison Judgements

Decision MakersZiraat Daruma Akbank Garanti HSBC IFC UBS Finansbank

Comparisons Ahmet Keskin Selçuk Keremoğlu Derya Ergören Serkan Pak İrem İnce Emre Saracoğlu Yeşim Sümerkan Oğuzhan Dumanlı Average

Current State

1 0.14 0.17 0.14 0.20 0.20 0.14 0.13 0.33 0.172 4.00 4.00 7.00 5.00 4.00 5.00 0.13 1.00 2.473 7.00 0.50 5.00 6.00 4.00 5.00 8.00 3.00 3.874 0.20 0.50 7.00 0.17 3.00 0.20 0.14 0.20 0.465 0.33 1.00 9.00 1.00 3.00 7.00 1.00 5.00 2.05

Firm's Propertie

s

6 5.00 0.33 0.14 0.20 0.20 1.00 1.00 0.14 0.447 0.50 6.00 0.11 0.20 5.00 1.00 1.00 1.00 0.878 1.00 0.33 0.14 6.00 0.14 1.00 0.14 0.33 0.469 3.00 8.00 0.11 0.13 0.14 1.00 6.00 0.33 0.75

10 0.33 2.00 9.00 7.00 7.00 1.00 1.00 0.33 1.7711 2.00 0.33 0.11 8.00 0.20 1.00 0.13 0.33 0.5112 0.25 2.00 8.00 0.13 5.00 1.00 7.00 3.00 1.64

Exterior Conditio

ns

13 0.33 3.00 0.14 0.14 3.00 5.00 7.00 7.00 1.4014 4.00 1.00 8.00 7.00 3.00 0.33 8.00 0.20 2.0915 5.00 0.33 9.00 7.00 0.20 0.20 0.14 0.20 0.7716 0.50 2.00 0.14 8.00 5.00 1.00 0.14 1.00 0.97

Profitability

17 3.00 5.00 0.13 6.00 5.00 1.00 0.13 3.00 1.4618 0.33 2.00 8.00 7.00 6.00 1.00 8.00 3.00 2.9319 0.33 1.00 0.14 5.00 0.20 1.00 0.13 0.33 0.4620 3.00 3.00 9.00 0.14 0.33 1.00 0.14 3.00 1.0621 0.33 2.00 0.13 7.00 5.00 1.00 7.00 0.33 1.27

Cycles22 1.00 3.00 8.00 3.00 1.00 1.00 0.13 0.20 1.0823 1.00 0.50 8.00 3.00 1.00 1.00 0.13 1.00 1.0524 0.33 2.00 0.13 0.33 1.00 1.00 8.00 5.00 1.01

Financial Structure

25 3.00 3.00 0.13 1.00 0.14 0.33 1.00 0.33 0.6026 3.00 5.00 8.00 0.33 0.14 1.00 4.00 3.00 1.7027 4.00 5.00 0.14 5.00 0.33 5.00 0.14 5.00 1.4328 0.25 1.00 0.13 0.20 0.33 1.00 1.00 0.20 0.3829 3.00 0.20 0.14 0.20 3.00 0.33 0.20 1.00 0.4930 4.00 3.00 6.00 6.00 7.00 1.00 0.14 3.00 2.45

Credit Risk

Analysis

31 1.00 0.14 8.00 1.00 0.20 0.14 0.14 0.33 0.4532 1.00 0.50 6.00 0.14 3.00 5.00 0.14 1.00 0.9933 5.00 8.00 8.00 5.00 5.00 1.00 8.00 5.00 4.8834 0.17 0.33 0.14 0.17 0.33 1.00 1.00 0.33 0.3335 6.00 7.00 8.00 5.00 3.00 3.00 8.00 5.00 5.2836 4.00 0.50 0.14 1.00 3.00 1.00 0.17 0.33 0.68

Priorities of CriteriaResults in the order of criteria Results in the order of importance

A1 Market Share 5.9% D3 Net Profit Margin 10.6%A2 Quality of Other Creditors 0.9% F4 Leverage Ratio 10.4%

A3 Market Diversification 2.1% A4 Buyer/Seller Concentration 7.4%A4 Buyer/Seller Concentration 7.4% F3 Cash Liquidity 6.8%

A5 Sector Diversification 3.1% A1 Market Share 5.9%B1 Firm Size 1.8% F1 Current Ratio 5.8%

B2 Age of the Company 1.0% D2 ROE 4.4%B3 Corporate Governance 1.1% F5 Gearing Ratio 4.2%

B4 Succeser Risk 0.6% D4 Efficiency 4.0%B5 Reputational Risk and Morality 0.6% F2 Acid Liquidity 3.8%

B6 Track Record 1.3% D1 ROA 3.7%B7 Tangible Collateral 0.9% D5 Financial Expenses Coverage 3.5%

C1 Country Based 1.2% A5 Sector Diversification 3.1%C2 Competitive Analysis 1.3% E3 Deadline of Payables 2.5%

C3 Sector's Position and Direction 2.3% E2 Dadline of Receivables 2.5%C4 Foreign Currency Risk 1.5% E1 Stock Cycling Rate 2.4%

D1 ROA 3.7% C3 Sector's Position and Direction 2.3%D2 ROE 4.4% F6 Liabilities to Sales Ratio 2.2%

D3 Net Profit Margin 10.6% A3 Market Diversification 2.1%D4 Efficiency 4.0% B1 Firm Size 1.8%

D5 Financial Expenses Coverage 3.5% C4 Foreign Currency Risk 1.5%E1 Stock Cycling Rate 2.4% C2 Competitive Analysis 1.3%

E2 Dadline of Receivables 2.5% B6 Track Record 1.3%E3 Deadline of Payables 2.5% C1 Country Based 1.2%

F1 Current Ratio 5.8% B3 Corporate Governance 1.1%F2 Acid Liquidity 3.8% B2 Age of the Company 1.0%F3 Cash Liquidity 6.8% A2 Quality of Other Creditors 0.9%F4 Leverage Ratio 10.4% B7 Tangible Collateral 0.9%F5 Gearing Ratio 4.2% B4 Succeser Risk 0.6%

F6 Liabilities to Sales Ratio 2.2% B5 Reputational Risk and Morality 0.6%

Suggestions

This model can be used in a greater project that contains:

Exposure at Default

Loss Given Default

The results of this model can be used by companies,especially by SMEs.

These results can be used in a credit risk rating process for both the rating organizations and the banks.

The resulting values are a crucial input for the potential academic research