Loan Analysis Course

This hands-on short course will provide you with the full range of credit diagnostic skills you need to assess credit risk inherent in potential clients. The focus of the course is for you to develop holistic credit analysis skills to examine the full range of internal quantitative as well as external business environmental, qualitative, strategic and management risks that can impact upon corporate cash flows of clients and therefore a client’s ability to honor its debt repayments. Through cash flow forecasting and financial modelling, you will learn how to anticipate future risk crystallization and its impact on future client cash flows.
Main Training Modules
Fundamentals of Credit Risk
ü The key macro and micro financial concepts behind, and drivers of, credit risk
ü Measurement of credit risk and adverse outcomes
ü Assessing credit risk and default probability of loan portfolios
ü Key determinants for managing credit risk:
• Probability of default (PD)
• Exposure at default (EAD)
• Loss given default (LGD)
ü Credit migration and transition matrices
ü Fundamental analysis of financial statements, key ratios, qualitative characteristics of the balance
sheet
ü Off balance sheet and contingent credit risk
ü Market-based approaches, bond spreads, swap rates
ü Counter party credit risk
ü Credit scoring, credit risk modelling, risk profiling and assessing creditworthiness
Credit Ratings Methodologies and Application
ü Review of ratings classifications systems of the major Credit Ratings Agencies (CRAs)
ü The principal credit ratings agencies – Moody’s, Standard & Poor’s, Fitch
ü Overview of the ratings methodologies – issuer analysis, historical data, business cycles
ü Commercial paper ratings
ü Sovereign ratings – approach to developed markets and emerging markets
ü Conflicts of interest – representing credit issuers but designed to protect credit purchasers Why
did the CRAs perform so poorly in the rating of collateralized debt obligations (CDOs) and other
derivatives?
ü Ratings migration matrices – use by banks in determining credit risk value at risk (VaR)
ü Impact of upgrades/downgrades on market perceptions of creditworthiness Dodd-Frank Act deemphasis
on reliance by financial firms on external ratings
Capital Charges and Accounting Principles
ü Review of the distinction between the banking book and the trading book
ü Basel III attempts to address regulatory arbitrage
ü Treatment of securitizations and off-balance sheet exposures
ü Detailed examination of IFRS 9
ü Recognition of expected losses and early warning of asset impairment
ü Amortized cost – held to maturity requirements
ü Fair value though other comprehensive income (FVOCI)
ü Fair value through profit or loss (FVPL)
Counter-Party Credit Risk
ü Examine the various facets of credit risk which hinge on losses sustained from failure of an
obligor to honour contractual obligations
ü Distinguish the separate components of credit risk:
• Probability of default by obligor – how reliably can it be estimated?
• Probability of downgrade or widening credit spreads of counter party
• Recovery rate – what percentage of obligation can be recovered after default?
• Credit exposure – estimating loss magnitude in relation to capital buffers
ü Determination of a credit default event, ISDA Master Agreement, Credit Support Annex
ü Understand the concepts of credit rating and scoring and critical examination of how useful such
techniques are for determining actual risk of default?
ü New components in the Basel III framework for addressing issues related to default and
deterioration of the credit quality of counter parties
ü Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
ü Explanation of key concepts of Expected Exposure (EE), Expected Positive Exposure (EPE),
Wrong Way Risk (WWR)
Measuring Credit Risk and Techniques for Credit Risk Modelling
ü Credit Metrics, credit scoring and credit rating systems
ü Quantitative modelling of credit risk using stochastic processes
ü Estimating probability of default – KMV Model, distance to default techniques
ü Explain how debt and equity can be understood as options on the firm
ü Techniques for modeling default risk of CDO’s, CMO’s and other structured vehicles
ü Lessons from SIVs and other off-balance sheet financing on credit risk management
ü Adapting VaR measures to include a metric for default value at risk
ü Credit Migration matrices
ü Credit VaR (CVaR) and Market VaR Portfolio CVaR – joint probabilities of default – copula
techniques
ü Techniques for estimating LGD and recovery rates
Sovereign Credit Risk
ü Principal factors used to determine creditworthiness of a sovereign
ü Issues relating to sovereign bonds under different jurisdictional frameworks
ü Deterioration in public balance sheets –high debt/GDP ratios
ü Linkage between sovereign risk and risks to local banking system
ü Macro-economic drivers of ratings – global imbalances, surplus/deficit nations
ü Role of sovereign Credit Default Swap (CDS) market – is it still vital or declining?
ü Sovereign debt re-structuring- bail outs/bail-ins
ü Protection to different stakeholders – seniority of claims, preferred status of central banks
ü Collective Action Clauses (CACs)
ü Sovereign domino thesis and financial contagion
Stress Testing Methods, Benefits and Limitations
ü Overview of sensitivity of credit to market risk, interest rate risk, systemic risk
ü Explanation of the techniques for conducting stress tests
ü Back testing using historical returns
ü Stress testing using hypothetical returns
ü Explanation of Principal Components Analysis
ü Sizes of historical samples – are they sufficiently large to include wide variety of conditions?
ü Benefits of more loosely coupled systems as less fragile.
Interpreting Credit Related Market Data
ü Monitoring government bond yields and changes to the term structure of interest rates for US
dollar, euro, sterling, and yen
ü Theories of the yield curve
o Liquidity premium
o Safe-haven premium
ü Credit spreads for investment grade and high yield instruments relative to government issue and
inter-bank rates
Credit Assessment and Financial Ratio Analysis
ü Financial Statement Analysis
ü Credit Assessment based on detailed analysis of corporate balance sheets, income statements and
cash flow statements
ü Impact of Corporate actions – capitalization or consolidation, rights issues
ü Financial ratios – Profitability, Liquidity, Asset turnover, Gearing
ü Liquidity ratios, pay-out ratios, financial stability ratios, operational gearing
ü Dividend policy, return on equity (ROE), Return on Capital Employed (ROCE)
ü Earnings per share, P/E Ratios (historic and prospective)
ü Dividend yield, Dividend/interest cover, Price/book
ü Ratio based Methods for Determining Credit Stress and Defaults
ü Altman’s Z score model, KMV Model, Moody’s Analytics,
Managing Credit Risk and Regulatory Capital Charges for Credit Risk
ü Mechanics of credit derivatives and how they can be used for hedging portfolio credit risk
ü Single name credit derivatives (unfunded and funded structures)
ü Basket and Tranche CDS, index based CDS
ü Impact on regulatory capital from use of, and exposure to, credit derivatives
ü Regulatory capital under Basel III
ü New approaches to capital charges for credit risk under Basel III
ü Stress testing – how to conduct stress testing with Monte Carlo Simulations
ü Calculating capital charges for credit exposures
• Standardized approach
• Foundation internal ratings-based approach
• Advanced internal ratings-based approach
Credit Value adjustment (CVA) and collateral Management
ü Definition Credit value adjustment (CVA)
ü Defining credit exposure in relation to market risk impact on derivatives
ü Expected positive exposure and worst-case exposure
ü Nature of collateralization – ISDA treatment
ü Benefits of effective collateral management
ü Eligible hedging instruments
ü Bilateral counter party risk and collateral
ü Over-collateralized positions and risk of counter party default
Way forward After the Training
Participants will develop a work plan through the help of facilitators that stipulates application of skills
acquired in improving their organizations. ASPM will continuously monitor implementation progress after the training.
Training Evaluation:
Participants will undertake a simple assessment before the training to gauge knowledge & skills, another
assessment will be done after the training in-order to monitor knowledge gained through the training.