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1、Credit Risk Management Enhancing Your Bottom Line The AFP 23rd Annual Conference New Orleans November 3-6, 2002 Ebrahim Shabudin Managing Director Deloitte & Touche LLP Credit Background Thorough identification and accurate measurement of credit risk, supported by strong risk management can help imp
2、rove 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 businesses Value Proposition Credit plays a critical role in “selling” products
3、 and services Expands revenue opportunities with creditworthy, incremental customers Utilizes innovative structures to support business relationships Effective credit risk management limits credit losses and provides stable cash flows and earnings Marketplace rewards companies exhibiting earnings an
4、d cash flow stability with higher P/E multiples Marketplace penalizes credit induced volatility and “surprises” Raises questions about quality of management Corporate Credit Risk Companies are exposed to significant levels of credit risk emanating from different sources Accounts Receivables Other No
5、tes Receivables 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 C
6、ritical Suppliers to the company may pose specific credit risk DSO Impact an example Actual Q3 A/R Q3 Sales DSOs = Hypothetical DSOs Q3 Sales Q3 A/R = Company A $295,396,000 $261,201,000 124* Peer Average 51.3 D Cash 51.3 $261,201,000 $122,002,230 +$173,393,770 * Equals 295.4M/261.2M x 90(or number
7、of days in sales period) Credit 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 (buyers) may be concentrated in selected ind
8、ustries and provide limited portfolio diversification opportunity Poor credit risk management resulting in negative impact to bottom-line is heavily penalized by markets Credit Strategy & Risk Tolerance ?Credit Strategy Statement and Risk Tolerance ?Management Review ?Coordination with Business Meth
9、odology Plan Improve Profitability Credit Strategy/ Plan?Specific Quantifiable Objectives Credit Objectives and Risk TolerancesCredit PoliciesCredit Risk Management ProcessesCommon PerformanceMetricsReportingThe business strategies and objectives drive the establishment of credit policies and proced
10、ures. 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 Consider Origination/ Assessment ?Administration Credit Policy Credit Approval Auth
11、ority Limit Setting Pricing Terms and Conditions Documentation: Contracts and Covenants Collateral and Security Collections, Delinquencies and Workouts Monitoring/ Control Exposure ?Management Aggregation Control ?Periodic Account ?Reviews Payments/Aging ? Credit Condition Compliance with ?Covenants
12、, Terms Technology/Reports ? Transactions/ ?Bookings Risk-adjusted Return ?Risk Management Portfolio Management Concentration Diversification Sales Channels Risk Strategy Underwriting Standards Credit Application ? Allowance for Bad Debts ?Analysis ?Risk Mitigation Objectives Type of Exposure Busine
13、ss/ Industry Financial Credit ?Credit Scoring and Ratings Instruments or Methods Performance Management Performance-based management utilizes metrics that measure actual performance against predetermined thresholds. The thresholds are established taking into account the organizations strategy, opera
14、ting environment and process controls. ?Business Strategy Systems Operations Finance Business Performance Measures Value Creation Organizations need a rigorous set of measures to support continuous improvement The measures drive value creation and should support problem identification and correction
15、. Credit Risk Managements Inter-related Activities CREDIT POLICY Origination Sales channels Reporting Credit Analysis Financial analysis Credit analysis RISK MANAGEMENT Disposal / Risk mitigation Risk rating Credit scoring Exposure aggregation Exposure measurement Management reporting Recoveries Col
16、lections Customer management Portfolio management Credit Decisions Pricing & terms Credit limit Collateral acceptance Compliance Transactions Collateral management Contracts & Documentation Credit Risk Management A complete and coherent risk management framework contains the following elements Credi
17、t Policies & Procedures Credit Strategy & Risk Tolerance Governance, Control and Implementation Measurement Methodologies Analysis & Risk Management Technology & Data Integrity Reassessment Credit Strategy & Risk ToleranceA New Paradigm A new business paradigm had evolved: causing a lack of reliance
18、 on good fundamental analysis The idea that stock market values 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
19、personal and corporate ethics Implications for Corporate Governance 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 disclosu
20、re requirements Importance and implementation of sanctions Increased legislation and compliance requirements Credit Risk Management Strategic Vision A business model view of Credit Risk Infrastructure components Vision: Managing Risk/Return Pricing decisions,Performance measurement, business and cus
21、tomer segmentation, compensation, etc. Near Term: Managing Economic Capital / Credit VaR Portfolio Risk Concentration, Risk Based Limits, etc. Short Term: Managing Expected Loss Risk Identification, Transaction Structuring, Approval & Pricing Decisions, Reserving, etc. Foundation: Credit Rating and
22、Underwriting Standards Risk Identification, Origination, Credit Administration, etc. Development Stages Foundation Stage includes application of risk identification methodologies, risk scoring or rating systems and strong underwriting standards Basic Stage tends to include managing on a transactiona
23、l 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 application of highly developed measurement techni
24、ques for transactions and portfolios, supported by decision-making relating to segments or businesses against established hurdle rates. Credit Risk Clarified Credit risk is defined as the risk of loss or potential loss resulting from: Default in contractual obligations by a customer Migration in con
25、dition and rating Deterioration in performance Credit risk includes both an expected (predictable) and unexpected (volatile) loss component. Businesses have to contend with Expected and Unexpected Losses Expected Losses Anticipated Cost of doing business Charged to provisions Captured in pricing Rel
26、atively easier to measure Unexpected Losses Unanticipated but inevitable Must be planned for Covered by reserves Allocated to businesses Difficult to measure Assessing unexpected loss requires making qualitative judgments around potential volatility of average losses Assessing expected loss includes
27、 determining exposure, default probability and severity Credit 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 ability to properly identify and evaluate the potentia
28、l 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 culture Important Building Blocks Effective Credit Risk Management
29、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 Methodologies to assess net profit contributions by custom
30、ers 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 and concise Credit Underwriting Standards mu
31、st 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 respected Risk Monitoring Exposure must be complete and current Regular reporting and updating of clients payment per
32、formance Minimum annual reviews of clients should be performed Financial conditions should be regularly assessed Required action must be initiated and follow up must take place Contract Terms and Documentation Contract negotiations must take place at the right level in the organization Appropriate a
33、pprovals 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 resolution Risk Rating System Effectiveness Credit Scoring is generally used t
34、o “risk rate” homogeneous portfolios Highest applicability is in consumer and retail portfolios Some advanced scoring systems are being migrated for use in rating “middle market” clients Such models are only as good as the underlying assumptions Internal credit rating systems are difficult to assess
35、 and are often not independently validated Client relationship may interfere with objective assessment of risks Rating criteria usually a matter of practice rather than written policy Ratings are not consistent over time Qualitative credit assessments often lag current market information Institution
36、s often assume a mapping with external ratings in order to quantify credit risk Effective Risk Rating Systems Sufficient granularity of risk rating categories Accurate and timely assignment of ratings Clear and consistent application of default definition Periodic calibration, triangulation and vali
37、dation 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 and obtained on a r
38、egular 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 numerical analysis Peopl
39、e 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 decisions Art and Science of Judgment Getting access to th
40、e 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 losses Concluding Comments Compa
41、nies 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 values Concluding Comments Risk Assessment and Limit Management ? Credit Quality ? Credit Underw
42、riting ? Risk Rating System Effectiveness ? Counterparty and Portfolio Limits Credit Infrastructure and Portfolio Management ? Organizational Structure ? Policies and Procedures ? Technology Selection and Implementation ? Problem Asset Management Credit Analytics Support ? Risk Rating Calibration ?
43、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 Technology Enablement ? Credit Risk Measurement ? Credit Performance Scorecards ? In
44、ternal Software ? External Vendor Software Appendix: Business Proposal Checklist Business 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 Amou
45、nt, purpose, terms and conditions Sources of repayment clearly identified Client payment history and relationship Appendix: Business Proposal Checklist Rationale and Analysis Customer, Guarantor, Collateral, Support Facility Description Amount, purpose, tenor, pricing, terms, conditions, covenants,
46、restrictions etc. Consider affect on above e.g. new leverage Facility Rating? Repayment Capacity Future cash 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 acceptabili
47、ty Appendix: Business Proposal Checklist Client Relationship Business strategy: increase, maintain or decrease exposure or exit relationship Consider relation to rating, latest risk profile and payment performance Customer profitability: risk adjusted return, revenue, fees, direct and allocated cost
48、s etc. Any conflicts of interest or special concerns Appendix: Business Proposal Checklist Macro Analysis Business Environment Review Customers competitive market position and future industry prospects: size, cycle, volatility, new entrants Strength of customers business and financial strategies Man
49、agement Evaluation: competency, experience and effectiveness Appendix: Business Proposal Checklist Customer Analysis Company history, background, objectives and performance Relevance and strength of future business plans Consider seasonality and scenario analysis Primary and secondary sources of rep
50、ayment Historical financial capacity and analysis of future performance: sales, profitability, working capital, liquidity, cash flow, leverage, tangible net worth etc. Quality of earnings Absolute and ratio analysis Peer comparisons 三茅招聘管理软件，永久免费，HR都在用。官方下载网站：http:/ Business Proposal Checklist Stren
51、gths, 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
