德勤的信用风险管理.ppt

Credit Risk Management Enhancing Your Bottom Line Credit Background lThorough identification and accurate measurement of credit risk, supported by strong risk management can help improve the bottom line lAn uncertain and volatile economic environment significantly impacts this ability lThe desire to grow and turn in outstanding results has a tendency to put pressure on the checks and balances within businesses Value Proposition lCredit plays a critical role in “selling” products and services Expands revenue opportunities with creditworthy, incremental customers Utilizes innovative structures to support business relationships lEffective credit risk management limits credit losses and provides stable cash flows and earnings Marketplace rewards companies exhibiting earnings and cash flow stability with higher P/E multiples Marketplace penalizes credit induced volatility and “surprises” lRaises questions about quality of management Corporate Credit Risk lCompanies are exposed to significant levels of credit risk emanating from different sources lAccounts Receivables lOther Notes Receivables lBuyer and Franchise Financing lWith Recourse Financing Project Finance Structured Transactions Leases with Recourse lDerivatives Exposures FX, Interest Rate Risk, Commodities etc. lCollateral Risk Parent or Third Party Guarantees Commercial and Standby Letters of Credit Note also that Critical Suppliers to the company may pose specific credit risk DSO Impact an example ActualCompany APeer Average Q3 A/R$295,396,000 Q3 Sales$261,201,000 DSOs =124*51.3 HypotheticalD Cash DSOs51.3 Q3 Sales$261,201,000 Q3 A/R =$122,002,230+$173,393,770 * Equals 295.4M/261.2M x 90(or number of days in sales period) Credit as a Facilitator lCredit 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 industries 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 uSpecific Quantifiable Objectives uManagement Review Methodology uCredit Strategy Statement and Risk Tolerance uCoordination with Business Plan The business strategies and objectives drive the establishment of credit policies 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 Consider lCredit Policy lCredit Approval Authority lLimit Setting lPricing Terms and Conditions lDocumentation : Contracts and Covenants lCollateral and Security lCollections, Delinquencies and Workouts lExposure Management Aggregation Control lPeriodic Account Reviews Payments/Aging Credit Condition lCompliance with Covenants, Terms lTechnology/Reports Transactions/ Bookings Risk-adjusted Return n n Sales Sales ChannelsChannels n n Risk StrategyRisk Strategy n n Underwriting Underwriting StandardsStandards n n Credit Credit ApplicationApplication n n AnalysisAnalysis uuBusiness/ Business/ IndustryIndustry uuFinancialFinancial uuCreditCredit n n Credit Scoring Credit Scoring and Ratingsand Ratings Origination/ Assessment Administration Monitoring/ Control Risk Management n n Portfolio Portfolio ManagementManagement n n ConcentrationConcentration n n DiversificationDiversification n n Allowance for Allowance for Bad DebtsBad Debts n n Risk Risk MitigationMitigation n n ObjectivesObjectives n n Type of Type of ExposureExposure n n Instruments or Instruments or MethodsMethods Value Creation Business Performance Measures Organizations need a rigorous set of measures to support continuous improvement Performance-based management utilizes metrics that measure actual performance against predetermined thresholds. The thresholds are established taking into account the organizations strategy, operating environment and process controls. The measures drive value creation and should support problem identification and correction. nBusiness Strategy Systems Operations Finance Performance Management Sales channels Contracts & Documentation Credit analysis Credit limit Pricing & terms Credit Analysis Credit Decisions Collections CREDIT POLICY Collateral acceptance Portfolio management Financial analysis Disposal / Risk mitigation Collateral management Customer management Exposure measurement Management reporting Exposure aggregation Recoveries Credit scoring Risk rating RISK MANAGEMENT Credit Risk Managements Inter-related Activities Compliance Origination Reporting Transactions Credit Policies & Procedures Analysis & Risk Management Governance, Control and Implementation Measurement Methodologies Technology & Data Integrity Credit Strategy & Risk Tolerance A complete and coherent risk management framework contains the following elements Credit Risk Management A New Paradigm lA new business paradigm had evolved: causing a lack of reliance on good fundamental analysis lThe idea that stock market values would continue to go up indefinitely lIncreasingly competitive, complex and volatile market place lHigher than expected actual debt burdens lExtensive reliance on unrealistic future cash flows lFailures in corporate governance lQuestionable personal and corporate ethics Implications for Corporate Governance lCurrent organization structures to be revisited lClarity around roles and responsibilities lNeed for honesty, integrity and independence (self-regulation) lTechnical expertise of people and strong management processes lImproved disclosure requirements lImportance and implementation of sanctions lIncreased legislation and compliance requirements Foundation: Credit Rating and Underwriting StandardsFoundation: Credit Rating and Underwriting Standards Risk Identification, Origination, Credit Administration, etc. Short Term: Managing Expected LossShort Term: Managing Expected Loss Risk Identification, Transaction Structuring, Approval & Pricing Decisions, Reserving, etc. Near Term: Managing Economic Capital / Credit VaRNear Term: Managing Economic Capital / Credit VaR Portfolio Risk Concentration, Risk Based Limits, etc. Vision: Vision: Managing Risk/ReturnManaging Risk/Return Pricing decisions,Performance measurement, business and customer segmentation, compensation, etc. A business model view of Credit Risk Infrastructure components Credit Risk Management Strategic Vision 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 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 application of highly developed measurement techniques 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 Credit risk is defined as the risk of loss or potential loss resulting from: loss resulting from: Default in contractual obligations by a customerDefault in contractual obligations by a customer Migration in condition and ratingMigration in condition and rating Deterioration in performance Deterioration in performance Credit risk includes both an expected (predictable) Credit risk includes both an expected (predictable) and unexpected (volatile) loss component.and unexpected (volatile) loss component. Businesses have to contend with Expected and Unexpected Losses lExpected Losses Anticipated Cost of doing business Charged to provisions Captured in pricing Relatively easier to measure lAssessing expected loss includes determining exposure, default probability and severity lUnexpected Losses Unanticipated but inevitable Must be planned for Covered by reserves Allocated to businesses Difficult to measure lAssessing unexpected loss requires making qualitative judgments around potential volatility of average losses Credit Risk Management Explained lAlthough credit risk may be difficult to measure it is important to estimate and manage lWhat does Credit Risk Management mean? It represents an institutions ability 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 culture Important Building Blocks lEffective 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 Methodologies to assess net profit contributions by customers and appropriate business segments Proper allocation of capital and management resources lIn order to: Improve overall corporate performance, measured by a higher EPS or P/E ratio (or market value) Credit Policy and Process lCredit Policy should be clear and concise lCredit Underwriting Standards must be developed and included in policy lCredit Processes should be reasonable and allow quick response to clients lHealthy balance between sales and credit approval should exist and be respected Risk Monitoring lExposure must be complete and current lRegular reporting and updating of clients payment performance lMinimum annual reviews of clients should be performed lFinancial conditions should be regularly assessed lRequired action must be initiated and follow up must take place Contract Terms and Documentation lContract negotiations must take place at the right level in the organization lAppropriate approvals must be obtained lInternal or external legal departments must document completely lTerms and conditions should be understood and compliance mechanism put in place lExceptions must be reported and managed urgently to resolution Risk Rating System Effectiveness lCredit Scoring is generally used to “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 lInternal credit rating systems are difficult to assess 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 Institutions 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 validation of risk ratings Accurate identification of migration of transactions and portfolios (as reflected by upgrades and downgrades in ratings) Credit Evaluation: Financial Factors lGet the information you need to make a full analysis lSome information will need to be cross- checked and obtained on a regular and timely basis lBe constructively cynical: new business models are difficult to pull off lBe cognizant of delaying tactics lNumbers dont tell the whole story! Credit Evaluation: Qualitative Factors lEvaluation of subjective factors is often times more important than the numerical analysis lPeople make a business: visions, values and strategies are only words unless people implement them lManagement, industry, product, geography, competition etc. all influence results and must be properly assessed lAnalysis-paralysis may lead to wrong decisions Art and Science of Judgment lGetting access to the best clients and all the relevant information is a challenge lEnsuring proper analysis is done requires a strong corporate culture lUtilizing qualified resources both internally and externally enhances the results lOften the lack of the will to act is what causes high losses Concluding Comments lCompanies 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 ManagementCredit Infrastructure and Portfolio Management Credit Analytics Support Credit 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 Calibration 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 Scorecards Internal Software Internal Software External Vendor SoftwareExternal Vendor Software Appendix: Business Proposal Checklist lBusiness 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 history and relationship Appendix: Business Proposal Checklist lRationale and Analysis Customer, Guarantor, Collateral, Support Facility Description lAmount, purpose, tenor, pricing, terms, conditions, covenants, restrictions etc. lConsider affect on above e.g. new leverage lFacility Rating? Repayment Capacity lFuture cash flow, conversion of assets etc. Consistency with Credit Strategy and Policy lConfirm, and identify any exceptions to policy, underwriting standards, or pr