Hi Good afternoon everyone!!!

Well skipping all this fancy introduction, I would like to say I am Juhi, studied in Surat all my life then
went to Symbiosis for my MBA in Finance and am currently working with JP Morgan as a credit analyst
and can totally relate with you people sitting here in your second year of MBA juggling between
enormous lectures, events, guest lectures and what not!!

But today I would try to impart and share as much as I can about my knowledge and experience in credit
analysis. SO I have been working with JP in Mumbai since the past 16 months in the credit analysis unit
where I work on banks and insurance sector and I cover Core Europe. I think this topic will be of great
relevance to you MBA students because of the scope it offers in terms of jobs as well as personal life.

Now about credit analysis: It is something very simple yet very complex. Can someone please tell me the
meaning of credit analysis of banks and insurance sector. IN short, maine apna paisa kisiko diya hai to
mai aise hi thodi de dungi. I will investigate before giving, I will investigate after giving. In daily life also,
this is very relevant. Now there is a group of friends. There are all types of friends in a group. Some will
be like they always pay their share on time. Some will ask you for a loan: ki yaar aaj tu dede, tuje deta hu
kal wapis. Then the next day, someone will return you and some might not return. Then we wait for a
few days and write off that person ki yaar nahi hi aayega yaha se paisa toh. Then obviously from next
time onwards we will be careful while lending money to that friend.

As credit analysts our primary concern is to identify credit risk and rectify it. Now can anyone tell me
what is credit risk. It refers to the probable risk of loss if the borrower fails to pay the interest or the
principal amount leading to increase in collection costs.

Now starting with the process of credit analysis: our first step should be the EIC model i.e Economy,
Industry and Company. The economic conditions in which the bank is operating is very crucial. It
answers the questions such as:

1) GDP growth, fiscal position, currency fluctuations

2) What are the basel norms
3) What is the sovereign risk
4) Is the govt proactive or reactive. What are the preventive steps taken.

Next comes industry:

1) How is the banking industry as a whole? Like in India 75% is state owned and rest is private.
2) What is the situation of NPA’s
3) What are the diff types of banks: co-operatives, bancassurances, private banks, mortgage banks.

Then comes company which will be the bank/insurance company in our case.

For a bank there are an end number of factors to be looked into but they all revolve around just one
word- CAMELOS. (Capital, asset quality, management, earnings, liquidity, others, support). Can anyone
tell me what does this stand for? All these factors are captured in a bank’s balance sheet which looks as:
Liabilities Assets

Deposits from customers Cash and cash equivalents

Deposits from banks (60%-80%) Interbank assets
Senior debt Loans to customers (30-70%)
Subordinated debt Investments (15%-50%)
Other liab Other assets
Equity+retained earnings+reserves

IDEALLY DEPOSITS>>>LOANS

Firstly we analyse the qualitative aspects such as: Market position and management/strategy
aspects.

Market position- ………………….

Management: past performance, strategic objectives and risk controls and management.

1) Management’s ability to manage the bank in good as well as bad times.

2) Proven track record, career and education.
3) Check for litigations/scandals or court cases.
4) Risk appetite.
5) Culture of the Bank

Earnings: primary sources of earnings for a bank are: interest income, fee and commission, trading
and other operating income. We consider stability, diversification, level of provisions and
profitability.

1) Core/recurring earnings is its first line of defense to absorb losses stemming from credit,
operational and business risks.
2) Check for continuity of earnings, stability of income.
3) Comprises of NII, NFC, trading income and other op income.
4) Net interest margin= Yields-cost of funds. The bank earns this margin on its entire balance sheet.
5) Provisions against loans save banks from NPL’s are also known as credit costs. for each credit
exposure, there is a chance of NPA’s. The bank sets aside some part of earnings as provisioning.
Avoids capital erosion. We need to check for manipulation of books in case of provisioning.
6) Cost/income ratio is very crucial.
7) Ratios: RoAA, RoAE, C/I Ratios, NIM= net interest income/avg total assets.

Asset quality: quality of loans and securities. Slicing and dicing of data is very important. Collateral,
ratings of investments. Concentration by sector/borrower/issuer. Exposure to high risk countries.

MAIN ISSUE IS DIRECTED LENDING BY REGULATOR (AS SEEN IN INDIA, CHINA AND ASIA PACIFIC
COUNTRIES).
1) Investments: High risk and low risk investments. Inv in subprime assets, structured assets and
level 3 assets is very risky.
2) Are there any large exposures to a specific industry or borrower.
3) What % of loans are collateralized.
4) Quality of collateral. Is it readily saleable? What are the top 20 exposures?
5) Quantum of derivatives on balance sheet.

Capital: The Bank’s capital is the cushion used to absorb potential losses and avoid becoming
insolvent. (Tier 1 should typically be 60% and Tier 2). Level of capital (reported), access to capital,
RWA analysis, dividend payouts and stress test results.

Liquidity: funding mix. Concentration of maturities. Additional liquidity and access to markets. ALM
gaps and stress test results. EMERGING MARKETS RELY HEAVILY ON DEPOSITS. DEVELOPED
MARKETS WITNESS MORE OF WHOLESALE FUNDING. CHECK LDR RATIO. IF HIGH MEANS GIVING
MORE LOANS COMMON IN DEVELOPED MARKETS. LOW LDR MEANS LIMITED LENDING
OPPORTUNITY.

TALK ABT THE 4 SCENARIOS..!!

CAN BANKS DO ALL THIS ALONE? NO GOVT PROVIDES A SUPPORTING FRAMEWORK AND INSTILLS
DEPOSITOR CONFIDENCE.

1) Assesses bank’s ability to fund its assets in the normal course of business.
2) Liquidity is one the main reasons why banks fail (Example: Bear Stearns).
3) To check: concentration within any source of funding, composition of deposit base, ability to
renew maturing liabilities.
4) Asset liability mismatch.
5) Ratios: LDR, liq assets/total assets
6) IN weak markets, deposits are not the most stable form of funding.

We get a system generated metric FBI. Then along with peer analysis and qualitative analysis we
give an overall rating.