Among the most significant indicators of the effectiveness of a commercial bank is its loan portfolio. It can have a rather complicated structure and require a balanced approach to the interpretation of the indicators contained in it. But, despite this, banks have to regularly research their loan portfolio. The successful solution of this problem is the most important factor in the efficiency of a financial institution. What is the structure of the loan portfolio? How can the indicators contained in it be analyzed?
Loan portfolio specifics
A loan portfolio is, if one of the concepts common among Russian researchers is followed, the balance of debt to a bank (or other business entity) arising from the provision of loans to other organizations or individuals. The approaches to determining the value of the corresponding indicator can be very different.
For example, some researchers believe that it is necessary to include interest in the loan portfolio in relation to the full debt repayment schedule, others prefer to explicitly include only the main debt in it, and other loan components - to calculate according to special formulas. Argument - the credited entity may pay the debt ahead of schedule and thereby not pay interest.
The specifics of the analysis of the loan portfolio of the bank
An analysis of a bank’s loan portfolio is extremely important in terms of assessing the sustainability of the respective financial institution. The fact is that this type of commercial organization form the main part of the profit, as a rule, precisely through the provision of loans. However, it is important not only how much loans the bank has issued, but also how disciplined borrowers will be calculated. Thus, one of the key criteria that determine the quality of the loan portfolio of a financial institution is the solvency of the persons to whom it provides loans. It can be determined on the basis of a variety of indicators.
If we are talking about legal entities, then these can be:
- financial turnover;
- the level of the current credit load of the enterprise;
- the specifics of key contracts and other factors ensuring the stability of revenue;
- credit history.
Regarding borrowers in the status of individuals, their solvency can be determined based on:
- from the size of the salary;
- from the sustainability of the employing company;
- from the current level of debt;
- from the contents of the credit history.
As sources for conducting the appropriate analysis, both internal corporate documents and those that reflect the interaction of the bank with specific borrowers can be used. First of all, these are loan agreements, applications (in which, as a rule, detailed information about the client is indicated).
A loan portfolio is an indicator that reflects loans by terms, amounts, and also the level of profitability, determined on the basis of the terms of the contract with the borrower. Various economic risks may also be taken into account. The analysis of the bank’s loan portfolio is used, firstly, to determine the maximum possible profit of a financial institution, which may arise upon the borrowers returning their capital, and secondly, to identify possible factors that may prevent creditors from paying off on time and in full with the bank.
Portfolio structure
How can specific indicators characterizing the considered bank sustainability parameter be determined? What might the structure of the loan portfolio look like? Most often it is assumed that loans are classified on the following grounds:
- attribution to currency or ruble;
- method of provision;
- maturity;
- legal status of the borrower;
- country of origin of the credited person.
The specified list of criteria, of course, can be supplemented by other points.
What is not included in the portfolio?
It is noteworthy that some types of loans are not subject to inclusion in the loan portfolio. When it's possible? In the methodology of many banking organizations, it is customary not to include loans that are issued to state authorities, off-budget funds in the list of assets. This may be due to the issuance of such loans without significant collateral requirements or at interest rates that differ significantly from market ones. A loan portfolio is an indicator that reflects the typical activities of a financial institution. Preferential rate loans may not meet this criterion.
Loans that are not included in the loan portfolio of a commercial bank may also be issued to partner structures, other financial organizations of the holding, if the current institution is part of its structure, or to subordinate legal entities. Actually, in many ways such transactions relate to loans formally. In fact, it can be ordinary inter-corporate transfers, most often not aimed at making a bank profit.
Portfolio Analysis Steps
Let us now examine in more detail how the analysis of the loan portfolio of a financial organization can be carried out. Above, we noted the basic principles that underlie the corresponding study, namely, the correlation of the volume of current loans and factors affecting the success of their repayment by the loaned persons. Now our task is to consider the main stages within which the analysis of the loan portfolio is carried out. Modern researchers distinguish their following combination:
- analysis of factors affecting the demand and supply of bank services;
- determination of the credit potential of a financial organization;
- study of the structure of loans issued for possible compliance with the identified potential;
- study of current loan agreements signed by the bank and borrowers;
- assessment of the quality of the portfolio, development of recommendations for its improvement.
We will study the indicated stages of the analysis of the corresponding indicator of bank performance in more detail.
Factors of supply and demand of credit services
The factors in question can be classified on various grounds. As a rule, internal and external are distinguished. The first accepted to include:
- Bank liquidity, available capital, which can be used to provide loans;
- the availability of resources to cover a possible shortage of liquidity due to low payment discipline of customers;
- the specifics of the segment of commercial activities of the bank, the characteristics of the target client audience.
Among the external factors:
- economic processes taking place in a country, region or a specific locality;
- the level of competition in the bank lending market;
- CB policy - for example, in terms of the formation of the value of the key rate;
- legislative regulation of credit relations.
The Bank, analyzing these factors, can thereby determine those that are most significant in terms of the quality of the loan portfolio, and then use the data to improve the characteristics of the corresponding indicator.
Determination of credit potential
The next stage of portfolio analysis is to determine the credit potential of a financial organization. The solution to this problem involves first of all studying the sources through which the bank can receive revenue in the aspect of lending activities. In this case, the loan potential can be presented in two varieties: one that reflects the bank’s availability of short-term resources, and one that relates to “long” contracts with clients of a financial institution. What is the specificity of each of them?
Short-term potential is formed on the basis of the money that the bank accumulates on deposits, settlement accounts, salary accounts and other resources, through which it is possible to quickly increase liquidity. As a rule - within a year. The long-term potential, in turn, assumes that the banking institution has sources that can also be used as a tool to increase liquidity, but not immediately, but with the expiration of time, as a rule, not earlier than a year after the conclusion of the relevant agreements with the client . Management of a loan portfolio of a bank directly depends on the considered types of potential that characterize a financial institution. The parameter in question is among the most important from the point of view of analyzing the stability of the bank as a commercial structure.
According to some researchers, an institution’s access to external financing sources may be an element of credit potential. First of all, this, of course, loans from the Central Bank. But they can also be actively supplemented by loans from foreign markets. Another question is whether a particular bank has access to those. It can be limited both by economic criteria - for example, due to the fact that the current performance of the institution, according to the lender, does not meet the solvency criteria, and political - if the bank has sanctions imposed, as a result of which it cannot apply to foreign borrowers.
Potential Compliance Loan Analysis
The next stage of the study of the loan portfolio of a financial institution is an analysis of the relevance of loans issued to the identified value of potential, which we mentioned above. What type of tasks can the bank face in this case?
First of all, this is an assessment of the loan portfolio in terms of correlation of the urgency of contracts signed by a financial institution and borrowers and the speed of access to resources, which form the potential noted above. There should not be a situation in which the bank gives a large number of “long” loans, but at the same time it does not have “short” resources to maintain liquidity. Even if the borrower pays according to the schedule, the income may not be enough to solve the current tasks of the institution.
In some cases, banks, fixing the deficit of long-term potential and not having the resources to increase it, are forced to convert short-term resources into it. And it can also negatively affect the institution's liquidity indicators.
The analysis of loans for compliance with potential smoothly flows into the work forming the next stage of the loan portfolio research - the study of loan agreements concluded between the bank and the client. Let's consider it in more detail.
Contract study
Of course, it is unlikely that bank specialists will page by page review the contents of each contract with the borrower. It is technically very difficult and completely impractical from the point of view of labor costs. As a rule, a statistical analysis of the data contained in the contracts is carried out. The fact is that documents of the corresponding type contain very few differences. Most often they come down to:
- to the loan amount;
- to the difference between individually determined interest rates;
- to the urgency of repayment of the loan ;
- to the type of loan security.
The considered scheme is applicable, if, of course, we are talking about the analysis of contracts concluded with the same category of borrowers - for example, citizens officially employed at the place of registration.
It turns out that it is not at all necessary to study each document: it is enough to classify the sources according to groups suggesting unification according to some common feature. For example, it can be agreements that include an interest rate of 20% per annum or higher, or those that involve repayment of a loan within a year. Thus, the bank, exploring the risks of the loan portfolio, can simply accumulate the relevant information contained in the contracts, and this will be their study.
Based on the results of the corresponding stage of the analysis, a financial institution may have statistics that can be used to determine whether the development policy of a banking organization is sustainable:
- in terms of securing loans;
- in the aspect of correlation of conditions under loan agreements to the corresponding potential;
- in terms of revenue arising as a result of commercial activities.
Based on the results of the work, conclusions, assessments of the quality of the portfolio, as well as recommendations for its improvement are formulated within the next stage of the researchers' work.
Ratings and recommendations
The main task in this case is to correctly interpret the results of analysts' activities. The results of the work should be aimed at enabling them to be used as a practical tool for improving the bank’s development strategy. They should become a factor in optimizing the activities that shape the management of the loan portfolio of a financial organization.
Proper analysis of the corresponding parameter of the stability of the bank and its interpretation is the most important condition for the competitiveness of the institution in the market. The loan portfolio of Sberbank or another giant in the Russian banking sector is likely to be the benchmark. But with a balanced approach to determining the development strategy, any financial institution may well become a significant player in such a highly competitive market. A loan portfolio is not a set of figures for reporting. This is a real tool to improve the banking business model.
Assessment of the loan portfolio of a financial institution can be carried out not only by its internal structures, but also by external players - for example, investors. Of course, subject to the availability of access to relevant indicators. In this part, the competitive advantages of banks with a balanced loan portfolio will be expressed in the ability to receive large investments. Or - as an option - have preferences in gaining access to external loans. At the same time, potential partners of a financial organization in this part can also be authors of recommendations aimed at improving the bank’s development strategy based on the results of a loan portfolio study.