How to Prepare for a Turn in the Credit Cycle
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The document discusses the growth and profitability of commercial portfolios, indicating significant increases in transaction volumes and client engagement across multiple countries. It emphasizes the importance of effective training, market knowledge, and collaboration between front and back office operations for banks to manage risk and optimize profitability. Additionally, it highlights various factors that banks can control to enhance relationship management and pricing strategies.
How to Prepare for a Turn in the Credit Cycle
- 1. © 2019 Lender Performance Group LLC 2010 2011 2012 2013 2014 2015 2016 2017 2018 $72B $147B $203B $294B $615B 2019E >$1T 2X GROWTH Every 6-12 months See & assess profitability of a commercial portfolio of over $400B each week Pricing commercial transactions at a run-rate of more than $1T per year Across 6 countries, 3 continents 1 of every 8 US banks >$1B Clients from $1B to over $2T Over 200 banks, +12k users Who We Serve
- 2. © 2019 Lender Performance Group LLC Loan structuring • Product mix • Rate types and maturities • LTVs and collateralization • Guarantees • Risk rating concentrations • Self funding components (i.e. deposits) Fees • Origination fees • Unused line fees • Prepayment penalties Additional Levers • Holistic approach to managing client relationship profitability • Costs to originate and service What Can Banks Do Today to Prepare? Managing risk factors across loan and fee structures has a material impact on portfolio risk profiles
- 3. © 2019 Lender Performance Group LLC Effective Training • Situational and on-the-job rather than generic • Individualized rather than broad based Relationship Awareness • Clear understanding of customer profitability and risk profile by the Relationship Manager • Ability to react in real time to evolving aspects of a customer relationship (existing and/or new business) Market Knowledge • Bank and RM access to real time market trends • Situational, contextual market insights Front & Back Office Collaboration • RM understanding of bank risk policies • RM situational awareness for when to apply risk management structures Effective Deployment of Risk Based Pricing Best Practices for Pricing for Risk and Optimizing Customer Experience
Editor's Notes
- #2: We’ve been around since 2009, and in that time we’ve done pricing overhauls at more banks than anyone else in the world PrecisionLender is now used by more than 12,000 users in over 200 banks, spanning in assets from under $1 billion to well over $2 trillion We’ve recently gone live with a global client in 6 countries on 3 continents, and we now cover 1 in 8 commercial banks over $1 billion in the US All of that is to say that at this point, we’ve seen it all. Improving pricing and profitability will take more than just software, and our team of experts will be there to help. They’ve likely already faced whatever struggles you have more than once, and can offer guidance on what works and what doesn’t. This chart will give you a feel for that experience. Last year more than $600 billion in loans were priced on our platform, and that rate has been doubling every 6 to 12 months since we were founded In addition to the pricing, we also get portfolio data to measure profitability. If we were a bank, those portfolios would rank us among the biggest banks in the world, but it’s not just about size. It’s also about the diversity of the data. We’re seeing deals from hundreds of banks, covering all type of industries, sizes, and lenders In the modern banking world, value is becoming less about math and more about the quality of the data. Ours is the best in the world, and our clients get the benefit of that. I’ll show you a few examples in the demo.
- #3: a. Loan structuring i. Product mix. Are we seeing less lending in higher risk products (i.e. Construction lending, etc.)? ii. LTVs. For example in the CRE space, are we seeing a trend to lower LTVs? iii. Guarantees. Are we seeing more guarantees? More diverse guarantees from third parties (rather than PGs)? iv. Risk ratings. Are we seeing a trend towards “better” risk ratings? I.e. less lending to “worse” risk ratings? v. Rate types. What are we seeing in regards to the amount of fixed rate lending being done? What does this mean? vi. What else? b. Fees i. Are banks starting to ensure they are / will be paid for risk? 1. Origination fees. What trends are we seeing in regards to origination fees and what does this mean for being compensated for risk? 2. Unused line fees on operating lines. Are lenders being compensated for exposure that, when undrawn, is losing them money? 3. What else? c. What else?
- #4: Speed to funding and a low friction customer experience have arrived as the critical differentiators for Commercial Bank brands. How do you deliver this while enhancing risk based pricing?