Only products or services that can finally be sold in the market contribute to a company’s operating income. This may sound obvious and simple, but all too often companies produce rather what they like, and not what the market really wants.
Next, a credit analyst has to identify and give priority to the particular strengths and weaknesses of a corporate client and compare them with those of other players in the same industry. What we need to find out is how the company responds to the threats and opportunities of its industry.
1. Threats and opportunities of an industry A sound lending decision can only be made if the credit officer knows and understands his corporate client’s industry and business. Balance sheets can only be interpreted correctly if one knows industry-specific ratios.
We are going to finish this module with a Case Study in which we will try to examine most of the non-financial and financial factors affecting an individual business and how we may come to a considered opinion on the level of risk involved for a bank lending to that business.
It should be clear from all of our discussions so far, that exact assessment of risk is impossible. The future holds many surprises! To counteract our inability to predict the exact risk with any one particular credit facility, banks try to keep overall risk within acceptable limits by several means, such as those highlighted on […]
Who is the debtor? This may seem an obvious, and perhaps irrelevant question, but the lending banker must be fully aware of the person or entity to which he is providing credit, and who, or what entity, will have a legal obligation to repay the loan.
A lending banker will often spend quite a while analysing information from the Balance Sheet and from the Profit and Loss Account and this can be very useful in assessing risk. We will look at this analysis in more detail in the next session.
The liquidity risk Branches are at the heart of the liquidity flow of a bank, and the main issue for the bank’s treasury department is to keep track of the overall changes in cash flows, aggregating flows from all units (branches + head office commercial business)
1. Credit Risks: Only one Category of Risks a Bank has to cope with All this shows that commercial banking is much more than «only» taking deposits and handing out loans. In view of the enormous financing needs of the banks target groups, however, lending will remain one of the most important business sectors of […]
Next, let us turn to the Profit and Loss Account, which is designed to show the profit or loss which a business achieved or suffered during a particular accounting period. It does this by showing the sales achieved during the period and deducting whatever costs were incurred to achieve those sales.
