Credit Analysis of Financial Institutions

The course aims to provide participants with an ability to do a full analysis of banks and other financial institutions demonstrating the full range of analytical tools with the capacity to apply them in practice. It provides an introduction to the macro-issues relating to market and regulatory authorities. It has practical exercises to understand the analysis of financial statements and the interpretation of financial ratios. Risk Analysis in relation to FIs are dealt with in detail. Early warning signals are also dealt for the different financial institutions.The course covers the detailed credit analysis of the Non Bank Financial Institutions- such as Leasing Companies, Insurance Companies and Fund Managers.

This course is designed for management associates who have joined a bank, those with one or two years experience in a financial institutions team ( which manages bank relationships). Relevant participants may also be in creit teams, credit administration, loan administration or might possibly be credit analysts.

Course Content

Day 1: Introduction to credit analysis

Types of financial institution, their function and key ratios
 Insurance companies
 Invest
 ment banks
 Commercial/universal banks
 Finance/leasing companies
 Investment management companies
 Venture Capital companies
 Pension funds.

Practical exercise: analysing the impact on a range of financial institutions of changes in macroeconomic and sectoral conditions

Calculation and interpretation of principal ratios
 Using spreadsheets
 Standardised packages
 Self-constructed spreadsheets (Excel analysis)
 Benchmarking
 Trend analysis
 Peer group analysis

Practical exercise: calculating free cash flow and other ratios for financial institutions

Risk Analysis Framework
 Top down approach
 Country risk
 Industry risk
 Institution-specific risk
 4 Cs of credit rating analysis

Case Study: Comparative country risk analysis from EIU and other institutions

Categorising and analysing risk
 Credit & Default risk
 Interest rate risk
 Exchange rate risk
 Fraud
 Operational risk
 Performance risk

Case Study: trading, derivative and investment risks

Market risk

Practical exercise: Comparing and ordering risks for a range of financial institutions

Financial Structure and financial institutions
 Cash flow statement, income statement and balance sheet
 Relating business activity to balance sheet and income statement
 Accounting policy
 Risk/return equation
 Income stability & expense control
 Liquidity
 Early warning signals
 Financial/non-financial indicators

Practical Exercise: Introduction to Value-At-Risk (VaR)

Day 2: Credit risk for banks

Understanding Financial Institution Organisational Structures
 Relevance of organisational structure
 Front office, middle office and back office
 Internal audit, governance and systems
 Internet banking and its consequences

Credit risk and banks: Loan Analysis
 Asset Quality
 Types of loan
 Portfolio analysis
 Non performing loans: definitions, reserving and accounting policies
 Loan and lease book
 Earnings quality by type of income
 Impact of earnings accrual and asset impairment policies
 Ratios used to measure performance, cost control and provisioning

Practical Exercise: Benchmark risk and institution-specific risk for a series of Middle Eastern banks

Performance Risk
 Operating environment
 Banking system structure and competition
 Regulation and supervision: prudential supervision, key regulations, proposed BIS guidelines
 Financial fundamentals
 Statement logic, limited disclosure, accounting conventions
 Business risk: loan quality and reserve adequacy; off balance sheet exposures; trading and investment risk, related parties
 Financial risk: stability of funding, gap management, liquidity, capital adequacy
 Performance risk: overall return, stability of income, control of expenses
 Early warning signals: financial and non-financial indicators of distress
 Management issues
 Risk management: credit, market, operating liquidity, legal and reputation risk
 Types of shareholding
 Organizational structures: holding companies double leverage and other risk
 Lender of last resort: public sector institutions.

Case Studies: Bank failures and their causes

Advanced Bank Products and Services
 Credit products: performing and non-performing loans, provisioning and write offs, leases, trade finance and bank guarantees
 Trading products: long and short securities portfolios, derivatives, repurchase agreements

Practical Exercise: Special considerations for high yield bonds – analysis of structure, pricing, risks and performance

 Investments: consolidation methods and investment valuation; accounting for goodwill and minority interests.
 Funding: deposits, commercial paper, lines of credit, senior and subordinated bonds, ordinary and preference equity

Practical Exercise: Risk modelling of a range of different bank financial products

Analysing a Bank’s Financial Statements
 Reporting requirements
 Balance sheet
 Income statement
 Accounting for non-performing loans
 Accounting for derivatives
 Other off balance sheet items
 International comparisons and differences
 Liquidity
 Asset quality
 Margins and performance
 What are sustainable earnings?

Case Study: Standard and Poors’ concepts of maintainable earnings

The Regulatory Environment
 The need to regulate the banking sector
 The international dimension (BIS & Basle 2)
 Domestic regulation
 Regional issues in the Middle East
 Current developments

Case Study: The implications of Basle II for financial institution credit analysis

Day 3: The Rating Agencies

Sources of Information
 Financial
 Non-financial
 Key issues
 Annual and Quarterly reports

Case Study: Reviewing financial institution reports

The Role of the Rating Agencies
 Different agencies
 Rating methodology for banks
 Comparison between corporate and bank rating
 Rating symbols
 The CAMEL(B) Approach to Analysis
 Accounting and disclosures
 Disclosure policy
 Impact of differing accounting policies
 Bank failures and early warning signs

Case Study: Analysing rating agency reports on financial institutions

Sovereign Risk
 Structural issues: Middle East by comparison to other regions
 Macro economic indicators
 Debt levels
 Social and political analysis

Case Study: Sovereign risk analysis in the Middle East

Product Risk – an example
 Securitisation: use and impact of off-balance sheet funding/SPVs

Case Study: Rating of securitisation transactions

Day 4: Finance/Leasing Companies, and insurance companies

Finance/Leasing companies: operating environment
 Types of lease
 Evaluating lease performance
 Lease credit scoring
 Key risks and competitive issues by sector

Practical exercise: delegates will present a leasing proposal and assess its creditworthiness from a rating standpoint

 Regulation in the Middle East
 Management issues
 Shareholders: quality of financial and business support; risks and benefits of cross subsidies

Financial Analysis of finance/leasing companies
 Lease accounting issues
 Lease management (including software issues)
 Funding risk and funding/requirement management
 Purpose payback
 Risks to repayment: sector- and company-specific analysis
 Protecting lender's interests
 Balancing risk and return

Case Study: early warning signals: lessons learned from a failed leasing company

Insurance Companies: operating environment
 Macro economic issues
 Current state of the life and non-life insurance industry in the Middle East
 Insurance versus general economic cycles; impact of capital markets
 Sector growth dynamics and key drivers
 Insurance types and their analysis – product risks
 Regulation and supervision:
 International benchmarks and differences between countries

Practical Exercise: Reviewing insurance companies’ performance

Financial Issues for insurance companies
 Asset vs liability risk
 Key accounting issues: premiums, claims and reserves, investment valuation
 Accounting principles
 Underwriting risk
 Reserve adequacy
 Re-insurance risk: utilization policy, credit and recovery risk
 Investment risk
 Performance risk
 Diversity and stability of income
 Investment return
 Control of distribution and operating expenses – management issues
 Valuation and other ratios for insurance companies

Case Study: Forecast of insurance companies’ performance and valuation

Financial risk for insurance companies
 Liquidity, solvency and gearing for life and non-life insurance companies
 Re-insurance
 Early warning signals, bankruptcy
 Framework for assessing management and operational risk
 Funding needs of insurance companies
 Capital structure concerns.


Day 5 Further issues

Investment banks and fund managers
 Operating environment – Middle East by comparison to OECD
 Key competitive issues by sub-sector: investment banks, wholesale brokers, specialists, prime brokers, retail brokers etc.
 Regulation and supervision
 Critical management issues for securities companies
 Financial fundamentals
 Accounting policies
 Performance risk
 Business risk: risk profile of securities company products and businesses
 Market risk / asset quality
 Funding stability and liquidity risk
 Capital adequacy
 Early warning signals

Case Study: Investment banks in the Middle East

Analysing derivative credit risk
 Credit, interest rate and exchange rate derivatives – use and misuse
 Credit risks, risk drivers and estimation approaches
 Settlement risk and pre-settlement risk
 Swaps, caps and swaptions – structures, risk and performance
 Comparison between derivative types
 Structuring transactions

Case Study: Financial institution misuse of derivatives – the Daiwa, Barings and recent Singapore examples

 Credit mitigation and enhancement
 Collateral types, amounts, and frequency of calling
 Effects on portfolios
 Unbundling complex products
 Differences between investment and retail banks

Funds and Fund Managers
 Operating environment
 Types of fund and risk profiles

Case Study: Credit analysis of venture capital companies

 Structure and legal status of funds, regulation and key parties

Case Study: Investment funds in the Middle East

 Financial structure – leverage and stability
 Market risk and performance – size, liquidity and asset quality
 Fund management as a people business – personnel/operational risks
 Performance and business risk

Final Exercise: Analysing cross-border risk for financial institutions

Delivery:	In house
Category:	Credit Control