Learning to weigh up financial risks
Who do you train?
Mostly we train credit analysts and relationship managers with at least five years' experience - otherwise they wouldn't understand what we're talking about. I personally facilitate such programmes in Putonghua or Cantonese in the Greater China area.
How do you become a credit analyst?
There's no particular requirement if you have common sense and can do analysis. You can come in with an MBA and pretty much have the training already. You can look at firms and their numbers and get a good idea. Some new graduates in bank management training programmes receive credit-analysis training as part of the rotation.
How does credit analysis in commercial banking differ from retail and investment banking?
Retail banks usually have credit departments which mostly do credit scoring. Borrowers who reach a certain score get loans. It's not a heavy analysis. They analyse markets more and people's income levels. It's statistics-driven. It's also different to investment banks where its number-crunching and risks are short-term. Major investment banks have their own credit-analysis programmes.
What do your courses emphasise?
Our courses mostly run for four to five days and we use the case-study method. We always tell trainees to do a thorough qualitative analysis first and then look at the numbers and whether they tell the story they have come up with. Often what bankers do is get a financial statement and analyse the numbers to death, then tell a story that's totally different from what actually happened.
How does qualitative analysis work?
Qualitative analysis basically looks at the environment. What are the conditions - political, economic, social or technological? What changes in the environment could impact the company you lend to? Then you come down to the industry. We use Michael Porter's Five Forces analysis. We examine the competition, the bargaining power of suppliers and buyers, and threats from new entrants and substitutes.
Then we study the company itself, looking at business and financial risks. Business risk is everything about whether a company can generate a cash flow from its operations. Financial risk is more about the management of that cash flow in order to meet obligations when they fall due. The crux of the entire credit analysis is management. No matter how good a product a company may have, if the management is bad, that company is not going to last.
Has technology affected the role?
Technology - the web especially - has helped make available a lot of information. It becomes a matter of reflecting and organising information into logical arguments to bolster or make the right lending decision.
What is the analyst's responsibility when borrowers default?
We don't fault the credit analysts or relationship managers unless they neglect risk monitoring and control. Banks are in the business of risk, but they take it on in a disciplined manner. Credit policies and procedures are in place for this reason. Risk triggers must be identified for monitoring and control purposes. As long as they do monitoring and control, and ask for help if the client may have a potential problem, he has fulfilled his responsibilities.
Milton Leung, consultant and executive coach, Sino Star Development