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Financial Training Training

Financial Training

Fundamentals of Bank Credit Analysis

Duration
2 day

This course is designed to introduce participants to the evaluation of bank credit risk.

Course Objectives

By the end of the course participants will be able to:

  • Understand the fundamentals of bank risk in a macroeconomic environment
  • Appreciate the basic qualitative and quantitative credit factors involved
  • To begin to perform basic analysis of a bank’s balance sheet, income statement, and offbalance items using the CAMEL framework
  • Interpret bank ratios through trend analysis and peer comparison
  • Understand the importance of capital, including regulatory capital under Basel II, on bank financials and reporting policies

Course Agenda

DAY 1

Session 1


Overview of bank credit analysis

  • Preliminaries – about the course
  • Are banks special? The distinguishing features of banking from other commercial activity
  • Risks banks face; relationship of credit risk to other risks; the importance of the analytical perspective
  • Four fundamental facets of credit risk; the purpose of bank analysis; divergence in analytical roles—this course: bank credit analysis

Session 2

The macro environment

  • Understanding the environment in which banks operate: industry structure and the regulatory regime
  • The post-Bretton Woods era: the impact of deregulation, capital markets development and product innovation
  • Sovereign vs. systemic risk
  • Internationally active vs. domestic banks

Session 3

Fundamentals of bank accounts

  • Bank financial statements and their significance: similarities with and differences from corporates
  • Balance sheet
  • Income statement
  • Off-balance sheet items and notes
  • The impact of accounting standards and treatment

Session 4

Bank credit analysis methodologies: introduction to CAMEL

  • Essential analytical concepts: quantitative vs. qualitative aspects of bank analysis data requirements ratio analysis
  • Corporate credit analysis and the 5 C’s
  • The origins and rationale for the CAMEL model
  • CAMEL, CAMELS and their variants

Session 5

CAMELS Analytical Framework: Earnings

  • Earnings: the analysis of earnings and profitability
  • Key distinctions: Interest income vs. non-interest income; core vs. non-core items, operating vs. non-operating; balance sheet vs. off-balance sheet linked; the relationship between earnings and cash flow; profits vs. Profitability
  • The relationship between earnings, leverage and capital
  • Measuring and comparing performance: key earnings and profitability ratios .i.e. ROA,
  • ROE, NIM, NIS, etc; Issues in bank costs; risk-adjusted performance ratios
  • Earnings and risk appetite; factors affecting margins; tradeoffs between risk and return
  • Nominal vs. sustainable earnings

Exercise 1: Comparing the profitability of two or more banks – in this exercise, participants are provided with financial data on a number of comparable banks and are asked to evaluate each in respect to profitability, noting any tradeoffs in terms of adverse effects on other financial attributes.

Session 6

CAMELS Analytical Framework

  • What is asset quality? Why is it important? Knock-on impact of asset quality problems
  • What is an NPL?: loan loss accounting; loan classification and other asset quality terminology; how loan loss provisioning works
  • Quantitative indicators vs. qualitative criteria; making the qualitative quantitative
  • Principal ratios (e.g. NPL ratio) and the most important indicators; asset quality ratio interpretation
  • Trade-offs between asset quality, profitability, liquidity and capital

Session 7

CAMELS Analytical Framework: Management

  • Evaluating management quality—overview and relative importance; lack of quantitative indicia, hence highly qualitative; differences from equity analyst perspective assessment from afar vs. the bank visit
  • Competing pressures on management: shareholders; customers; depositors; debt investors; regulators; rating agencies
  • Rating management: criteria and variables: level of competence; strategies and policies; information and control systems; using a scorecard approach; some red flags
  • Corporate governance evaluation and its relationship to management assessment; how corporate governance deficiencies affect bank creditors

Exercise 2: Comparing the asset quality of two or more banks using a format similar to the previous exercise, delegates are provided with financial data and asked to evaluate the banks in terms of their asset quality, and to observe how differences in asset quality may affect other financial attributes of the respective institutions.

DAY 2

Session 1


CAMELS Analytical Framework: Capital

  • Overview of Capital Adequacy
  • What is capital? What is the purpose of bank capital?
  • Types and sources of capital; terminology issues
  • Internal generation vs. external contribution
  • Regulatory capital: the genesis of Basel I and the rationale for Basel II
  • The Basel accord and the concept of regulatory capital
  • Core (tier 1) vs. Supplementary (tier 2) capital under Basel; tier 3 capital
  • Basel I deficiencies and the advent of Basel II; regulatory arbitrage
  • Basel II
  • How Basel II differs from Basel I
  • The 3-pillar framework; 3 approaches – rating based (external or internal)
  • Basel II and the concept of economic capital: PD, LGD, EAD etc
  • Pure economic capital vs regulatory capital
  • Basel II implementation in the EU and other major markets
  • Off-Balance Sheet Analysis under Basel I and II
  • Standard Contingent Liabilities
  • Foreign Exchange Commitments
  • Swaps, Futures, and Options Contracts
  • Evaluating capital adequacy within the CAMEL framework: a summary of approaches
  • Traditional solvency measures
  • Risk adjusted capital measures, e.g. the CAR and the Tier 1 ratio
  • Internal capital generation ratios and other indicators
  • The concept of capital quality and analytical capital

Case Study/Exercise 3: Rating the bank. In this exercise, participants are provided with more
detailed financial data on a group of banks and based solely on the data provided are asked
to rank and rate the institutions in terms of their overall creditworthiness. In contrast to other
exercises during the day, in this exercise, delegates break up into groups and function as a
credit committee.

Session 2

CAMELS Analytical Framework: Liquidity

  • The bank run and the perennial problem of bank liquidity
  • What is liquidity? What happens when liquidity dries up?
  • Categories of liquidity: asset liquidity vs funding liquidity
  • Measuring liquidity
  • Asset side measures (e.g. LAR)
  • Funding side measures (e.g. interbank ratio)
  • Cross-balance sheet measures (e.g. LDR)
  • Liquidity management and contingency funding (backup liquidity)
  • Difficulties in measuring liquidity—e.g. how liquid are ostensibly liquid assets? Key ratios and their limitations; questions to ask management
  • Gauging prospects for (and strength of) state support; central bank as a ‘lender of last resort’; the moral hazard argument

Session 3

CAMELS Analytical Framework: Sensitivity and Risk Management

  • Risks banks face: a taxonomy
  • Market risk and tools to manage it: ALM and VaR
  • Operational risk management
  • Credit risk management in the context of enterprise risk management

Session 4

Rating the bank: case study and group workshop

Session 5

The operating environment and banking system evaluation

Session 6

The role of the rating industry

Session 7 (optional, time permitting)

An introduction to bank earnings quality analysis: how banks cook their books

Note: Mini-case studies and exercises accompany most of the sessions. The course concludes with a major case study

Session 8 (optional, time permitting)

The distressed bank and early warning systems

  • Individual bank distress vs the banking crisis
  • Bank crises: their causes and impact
  • Early warnings: bank crises
  • Rehabilitating distressed banks and banking systems

Session 9 (optional, time permitting)

Deregulation, securitization and the current credit crisis

  • Background, causes and differences from prior crises
  • Critical events, timeline
  • Prognosis

Exercise 6: Depending upon time constrains: Group discussion on current credit crisis

Summary

  • Course summary
  • Feedback and Evaluation
  • Debrief

  • Course Dates & Locations

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  • In-house Training

Run this course in house and tailored to your requirements.

Call +44 (0) 500 734 734 or enquire online.

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