A data-driven approach to profitable growth in commercial lendingSean Hunter, CIO at OakNorth
April 28, 2021
Fast movers are already anticipating the bounce-back of the economy: we’ve heard from one bank that there is more demand for business loans than ever. The catch, they said, is that there is also more competition than ever. That doesn’t make much sense unless you realize that, while demand may have grown substantially, the demand from banks willing to address that demand has not. Banks are still chasing the same pool of borrowers with all the negative consequences that implies. For profitable growth, banks need to differentiate themselves and go where the competition is not. That doesn’t mean taking on more risk, it means having the ability to lend to overlooked market sectors and business types - ones which are good credits but may be difficult for other lenders to confidently take on as they don’t have the data or analytics to make an informed decision.
The opportunity begins with the bank’s own portfolio - ON Portfolio Insights helps banks identify borrowers that may represent opportunities for growth within their current book. For example, borrowers that have an immediate need for liquidity to reboot and rebuild, but that have businesses that have additional debt capacity and should be strong and profitable through the recovery. By providing these businesses with debt finance, a bank can no only help the business thrive but also achieve more growth itself. Because these are existing customers, the investment in time and effort of acquisition and onboarding has already been made, meaning this growth should be immediately profitable.
The ON Credit Intelligence Suite also provides sector insights to give a rich, data-driven picture of the factors driving revenues, costs, and market size for each of the sub-sectors in the existing portfolio or for any given borrower. A bank can use this understanding to choose where to invest further, pursuing momentum in sectors where the macroeconomic tailwinds are already building in their favor.
OakNorth also helps banks achieve growth in other ways. For new loan origination, ON Credit Analysis provides automatic financial forecasts (allowing intelligent covenant-setting) and peer analysis (giving a good sense of how a new opportunity stacks up against comparable businesses in the existing portfolio and in external data). As this and the credit report is all automatic, the operational efficiency can help the bank get in front of the prospective borrower with indicative terms and a bespoke facility before the competition. The additional insight given by forecasting can show where the bank can be flexible in structuring the finance to meet the needs of the borrower where competitors may be forced into a “one size fits all” race to the bottom on rates.
The ON Credit Intelligence Suite automatically updates forecasts as new financials are produced, and provides early warning signals when monitoring borrowers, so banks are alerted if a borrower is forecast to miss KPIs that were set or breach covenants. This allows the bank to stay proactive and deal with issues early so that growth remains profitable. The evolving “baseball card” view showing the current state of the borrower and their financials provides an ideal point of reference for a relationship manager. This means that before any meeting with the client, they are fully informed and able to act as a true financial partner. This in turn, will help the bank build a deeper, more consultative and ultimately more profitable relationship over time.
Finally, ON Portfolio Insights helps credit officers keep their finger on the portfolio pulse and spot any areas that are starting to soften before they truly become a genuine cause for concern. As it provides forward-looking stress tests that can be run on a regular basis, it can help a bank spot risks up to12 months earlier than they might otherwise be able to, allowing them to double down on areas of growth, while being able to take pre-emptive steps where things are not going so well.