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credit analysis


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#1 vindyjunior

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Posted 06 September 2003 - 10:53 PM

sad.gif Hi, I'm a junior bank Executive in one of the banks in Asia. I'll be sitting for a bank exam soon, and one of the major question asked is on analyzing & how to write a good credit report on commercial/bizz loans. Coming from a consumer loans background, i'm a bit blur on this. I would appreciate if you could explain in brief between using the P&L statement, Balance sheet Stat & Cash Flow stat in coming up with a good credit analysis on giving out loans to business loans & what are major points in those statements that I must use to do a good evaluation. Tq.

#2 loanuniverse

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Posted 07 September 2003 - 12:19 PM

Before I begin let me make a small distinction between what I do {credit analysis} and a {credit report}. I noticed that you kind of used both terms to describe the same thing. While it might be common to refer to credit work as either an analysis or a report, in my experience a credit report is usually associated with the overall credit worthiness of a company. However, a credit analysis is more specific and deals with the repayment capability of a borrower as it relates to a specific credit request. For example, you could get a credit report on thousands of companies, which will provide you with financial information and probably a rating on them. If one of those companies approaches your employer to borrow X amount of money, then a credit analyst will perform an analysis of the repayment, and probably use a credit report as a source of information for it.

Something else that is important to note is that a credit analyst should not approve the loan. The analyst should be limited to give his opinion or recommendation on the credit. The analysis is only a tool {the most important tool in my opinion} for the people with approval authority to determine if the risk of the transaction is warranted. Without getting to deep into it, lets just say that joining a department that is responsible for production with a department that is responsible to control credit quality is a bad idea.

Now to answer your credit analysis question:

A - First, a good credit analysis must have {at a minimum} the following addressed:

- The borrower must be identified {background, industry, management, etc} The amount of information can vary a lot and is determined mostly by the size of the request.
- The terms, conditions and pricing must be detailed.
- Financial information should be discussed. {see section B}
- Repayment must be identified. {see section B}
- Guarantor information if one exists. {see section B}
- A conclusion or recommendation ends the analysis.

B - While the above is mostly structural, the most important factors that you should keep in mind when performing a credit analysis on a borrower are:

- The most important goal is to answer all the Whys?. Most of the questions will arise from the financial performance of the company reflected by its income statement {do not use P&L, that is more of an operational term used by managers, you are a finance professional} Examples of important whys? That need answers:
1) Why did sales/revenue increase or decrease?
2) What happened to the cost structure of the company? Improved or deteriorated?
3) What happened to profits and profitability?

- You will also need to use the balance sheet to discuss the financial position of the company such as net worth, and turnover of trade assets {receivable & inventories}.
- Just as important will be to determine the source of repayment of the loan. This would take me a lot to explain, but let me summarize it by saying that profit does not pay loans. Only cash flow pays loans.

Hope this helped.





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