cm lecture 2
TRANSCRIPT
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8/14/2019 CM Lecture 2
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Credit ManagementThe Credit Initiation
Learning Objective
Take Risks but Calculated!!!
Presented By:
Asif Naqvi
Lecture # 2
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Credit Initiation
Target Market planning is the most important aspect of theCredit Initiation.
Target Market refers to business discipline & selectivity.
The Target Market (TM) process follows the formulation of theoverall business strategy for the Bank.
Identifying business potential, defining desirable opportunitiesand adhering to resultant marketing objectives.
TM identifies the acceptable and desirable profile of customersand the products to be offered.
Defines Risks Acceptance Criteria (RACs)
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The Factors Affecting the Target Market SelectionThe Factors Affecting the Target Market Selection
Political and Macroeconomic Framework Analysis:
An understanding and analysis of the macro environment is
necessary to decide on the overall growth strategy, balance
sheet/earnings targets, risk tolerance, and resource requirement
planning for each business group/sub-group in the domestic
network and each country in the International Division.
Political Structure:
Form of government
Key political forces/influencers Expected political changes and effect on economy/banking
sector
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The Factors Affecting the Target Market SelectionThe Factors Affecting the Target Market Selection
Demographic and Economic Data:
Area, population, population density, rural and urban population
mix, literacy rate, GNP, GDP, GDP per capita, balance of trade,
balance of payments, forex reserves, foreign debt, domestic
debt, savings rate, inflation rate, etc.
Economic Policy:
Role of the state
Key features of fiscal policy
Key features of monetary policy Expected changes and their projected effects
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The Factors Affecting the Target Market SelectionThe Factors Affecting the Target Market Selection
Legal Environment:
Level of sophistication
Degree of independence
Enforceability of security/collateral
Financial Services Industry:
Market size and level of sophistication
Market segmentation
Banks existing strategy and product offering in the market
Segments that the Bank is targeting
Identification of key players in those segments
SWOT analysis
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The Factors Affecting the Target Market SelectionThe Factors Affecting the Target Market Selection
Identification of Target Industries/Sectors:
Begin with an evaluation of the economy of the country as a whole:
What is the structure of the economy? Which sectors of the
economy (agriculture, manufacturing, service, mining, etc.) are
major contributors to the economy?
What are the priorities of the government?
(in Pakistan, for instance the five year plans, the AnnualDevelopment Program, the annual budget document and, the
SBP Annual Report, etc., are useful sources of data)
What are the growth trends, and sources of growth?
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The Factors Affecting the Target Market SelectionThe Factors Affecting the Target Market Selection
Industry Prioritization:
Determine which industries are a priority, based on:
Strategic importance to the country (export based, import
substitution, etc.)
Amount spent on acquiring products/services of the type that
the Bank offers
Credit quality and industry stability
Determine which industries are excluded
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Risk Acceptance Criteria (RACs)
RACs represent the minimum conditions under which the Bankis prepared to enter into transactions bearing an element of
credit risk.
RACs are the standard terms and conditions that would be
expected (keeping in view the environment and competition) indealing with each Risk Level within the TM
RACs should address eligible products, credit appetite, tenor,
security, support, documentation, covenants, pricing, etc., for
each type of client within the overall context of the industry
Annexure: Sample RACs
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Credit Risk Evaluation: 3 CsCredit Risk Evaluation: 3 Cs
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Credit Evaluation & Risk AssessmentCredit Evaluation & Risk Assessment
The 3 Cs of the Credit:
Character
Capacity
Collateral
Risk Assessment:
Business Risk
Management Risk
Product Line
Critical Success Factors
Risk Based Pricing.
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Credit Risk Evaluation
Credit Risk Assessment depends on bothCredit Risk Assessment depends on both
Qualitative & Quantitative Analysis.Qualitative & Quantitative Analysis.
Quantitative Analysis includes :Quantitative Analysis includes :
Balance Sheet AnalysisBalance Sheet Analysis
Income Statement AnalysisIncome Statement Analysis
Cash Flows AnalysisCash Flows Analysis
Analysis of Changes in EquityAnalysis of Changes in Equity
Future Sales ForecastingFuture Sales Forecasting
Sensitivity AnalysisSensitivity Analysis
Stress TestingStress Testing
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Credit Risk Evaluation
QualitativeQualitativeAnalysis includes :Analysis includes :
Nature of the companyNature of the company
Study the laws governing the company and theStudy the laws governing the company and thesectorsector
Market Share of the CompanyMarket Share of the Company
Management Depth/AssessmentManagement Depth/Assessment
Life of Plant & equipmentLife of Plant & equipment
Last BMR & Future PlansLast BMR & Future Plans
Credit Worthiness ReportsCredit Worthiness Reports
Market CheckingsMarket Checkings
Critical Success FactorsCritical Success Factors
Quantifying theQuantifying the Risk using Qualitative FactorsRisk using Qualitative Factors
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QualitativeQualitativeAnalysis Industry AnalysisAnalysis Industry AnalysisStructure of Industry:Structure of Industry:
Size and profitabilitySize and profitability
Quantify industry size, and profitability. Identify profit drivers.Quantify industry size, and profitability. Identify profit drivers.This, together with the financial profiles of key competitorsThis, together with the financial profiles of key competitorswould assist in identifying the winners and losers in thewould assist in identifying the winners and losers in theindustry:industry:
% of GDP% of GDP
% of revenues generated from local sales and from exports% of revenues generated from local sales and from exports
last 3 years growth in revenues, % due to increase in pricelast 3 years growth in revenues, % due to increase in priceand % due to growth in unit sales; sources of increases andand % due to growth in unit sales; sources of increases andexpectations for both for the next 12 monthsexpectations for both for the next 12 months
recent industry operating profit, sources of these profits andrecent industry operating profit, sources of these profits andexpectations for the next 12 monthsexpectations for the next 12 months
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysis
Maturity:Maturity: Identify the stage of industry life cycle in which the industry isIdentify the stage of industry life cycle in which the industry is
at the moment (embryonic, growth, mature, or declining)at the moment (embryonic, growth, mature, or declining)
Identify any recent change in degree of maturity and reasonsIdentify any recent change in degree of maturity and reasons
for changefor change
In as far as possible, give an estimate of how much longer theIn as far as possible, give an estimate of how much longer the
phase is expected to lastphase is expected to last
li i l i d
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysis
Degree of Industry Concentration / Fragmentation:Degree of Industry Concentration / Fragmentation:
Evaluate the level of concentration/fragmentation of theEvaluate the level of concentration/fragmentation of the
industry, and the buyers/suppliersindustry, and the buyers/suppliers
Identify where the maximum leverage lies (support this byIdentify where the maximum leverage lies (support this by
stating sale/purchase terms)stating sale/purchase terms)
Identify principal competitors, their market shares and recentIdentify principal competitors, their market shares and recent
changeschanges
Review economic / political / regulatory reasons for recentReview economic / political / regulatory reasons for recent
stability / change in degree of concentration and marketstability / change in degree of concentration and market
sharesshares
Q li i A l i I d
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysis
CyclicalityCyclicality::
How cyclical is the industry?How cyclical is the industry?
Does the industry have a positive or negative correlation withDoes the industry have a positive or negative correlation with
the cyclicality of the economy?the cyclicality of the economy?
Is its volatility higher/lower than that of the economy (i.e.,Is its volatility higher/lower than that of the economy (i.e.,
does it lead or lag the economy)?does it lead or lag the economy)?
Identify sources of cyclicality and industry efforts, if any, toIdentify sources of cyclicality and industry efforts, if any, to
reduce volatilityreduce volatility
Which part of the cycle is the industry in? How long is itWhich part of the cycle is the industry in? How long is it
expected to stay there?expected to stay there?
Quantify the effect of the cycle on industry revenues,Quantify the effect of the cycle on industry revenues,
operating profits, net operating cash flowoperating profits, net operating cash flow
li iQ lit ti l i dA l i I d t
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysisSources of Demand and Value Addition:Sources of Demand and Value Addition:
What are principal sources of demand for the industrysWhat are principal sources of demand for the industrysproducts / servicesproducts / services
Ascertain how much value is added by the industryAscertain how much value is added by the industry
What are the principal sources of value added (or the industryWhat are the principal sources of value added (or the industryvalue drivers) by the industryvalue drivers) by the industry
How much of the value added is retained by the industry (neHow much of the value added is retained by the industry (newentrants, suppliers, buyers, substitutes all compete for theentrants, suppliers, buyers, substitutes all compete for theadditional value that is created by an industry)additional value that is created by an industry)
How do the value drivers impact the structure of the industryHow do the value drivers impact the structure of the industry(in terms of profitability, bases of competition, concentration)?(in terms of profitability, bases of competition, concentration)?
What are the recent changes (and theWhat are the recent changes (and theeconomic/political/regulatory causes for the changes) in theseeconomic/political/regulatory causes for the changes) in thesesources and expectation for the next 12 monthssources and expectation for the next 12 months
Q li iQ lit ti A l i I dA l i I d t
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysis
Basis of Competition:Basis of Competition:
What are the bases of competition in the industry (examples:What are the bases of competition in the industry (examples:
product quality, distribution, sales terms, technology, price,product quality, distribution, sales terms, technology, price,
advertising/brand equity, after sales service, etc.)advertising/brand equity, after sales service, etc.)
How have the bases of competition changed: In the differentHow have the bases of competition changed: In the different
phases of the business cycle? Along the industrys life cycle?phases of the business cycle? Along the industrys life cycle?
With changes in technology? What is the expected futureWith changes in technology? What is the expected future
trend?trend?
What is the degree of product differentiation/commoditizationWhat is the degree of product differentiation/commoditization
in the industrys products/servicesin the industrys products/services
Barriers to entry & exit.Barriers to entry & exit.
Q lit tiQ lit ti A l i I d tA l i I d t
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QualitativeQualitativeAnalysis IndustryAnalysis Industry
AnalysisAnalysis
Government Support for Industry:Government Support for Industry: What are the sources (if any) of government support?What are the sources (if any) of government support?
protective tariffs, import quotas, licensing, etc.protective tariffs, import quotas, licensing, etc.
guaranteed access to credit facilities or provision oguaranteed access to credit facilities or provision osubsidized credit facilities, access to foreign exchangesubsidized credit facilities, access to foreign exchange
fiscal/tax policies regarding the industryfiscal/tax policies regarding the industry
What is their impact on industry revenues, profitability,What is their impact on industry revenues, profitability,operating cash flow?operating cash flow?
State recent rends and expectations (with reasons supportingState recent rends and expectations (with reasons supportingthe same) for next 12 months on sources of governmenthe same) for next 12 months on sources of government
supportsupport
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QualitativeQualitativeAnalysis ManagementAnalysis Management
The House is Open to Any Number of QuestionsThe House is Open to Any Number of Questions
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The House is Open to Any Number of QuestionsThe House is Open to Any Number of Questions
ThanksThanks