The annual review is like an annual check-up with the doctor - for the majority of patients, results come back with no issues or cause for concern. For others, there may be something that raises a red flag, and on occasion, there may, unfortunately, be a patient who gets bad news. If they’re lucky, the issue was caught early enough that it can be treated. There are two key challenges: the first is that many critical illnesses are diagnosed too late - even in countries with optimal health systems and services. The second is that even if a patient’s health looks fine today, there are external and environmental factors that can impact their future health and life expectancy. If doctors knew exactly which patients were going to develop health issues in the future, they could spend more time with those patients, rather than doing time-consuming annual check-ups with all of them.
This is a conversation we at OakNorth have time and again with commercial banks - every year, they’re required to conduct an annual review on each of their borrowers, and every year, the majority of cases come back in good health. The business is healthy, yet first-line credit teams are still expected to review their financials, determine their risk rating, and prepare the credit writeup. This takes almost as much time as performing a full credit assessment - time that could be spent originating new loans or working with the borrowers which are clearly in financial distress and present the most risk to the bank.
This is compounded by the fact that a seemingly financially healthy borrower today could become stressed or default in the future, but the bank either has outdated data or not enough of it, to discover this before a credit loss becomes inevitable. Despite sound initial due diligence and credit analysis, several things can happen both internally within a business, and externally within the macroeconomic environment (climate change, trade wars, pandemics, regulatory changes, etc.) which can impact its credit profile from one year to the next. Receiving these early warning indicators is critical as it enables the bank to address the increased risk in its book. If not captured early enough, the bank’s options for remedying the situation become more limited - much like a doctor diagnosing a critical illness too late.
Many banks still rely on excel spreadsheets, manual methods of gathering data, and human analysis. A solution such as the Portfolio Insights tool within OakNorth’s Credit Intelligence Suite can help plug this gap by enhancing risk management capabilities and increasing efficiency.
Many banks still rely on excel spreadsheets, manual methods of gathering data, and human analysis. A solution such as the Portfolio Insights tool within OakNorth’s Credit Intelligence Suite can help plug this gap by enhancing risk management capabilities and increasing efficiency. The software creates a forward-looking, 360° view of a bank’s entire credit portfolio at the granular borrower level, enabling the bank to conduct scenario analysis, proactively minimize credit losses, and identify growth opportunities. It aggregates data from multiple sources to create a unique and insightful view of a bank’s loan book. By taking a subsector-specific, forward-looking view, OakNorth enables banks to quickly understand the overall financial health of their borrowers, drill down to potential problem areas, and take corrective action before they become detrimental to the portfolio. Banks no longer need to wait for their borrowers’ updated financials, as they always have a clear view of which loans have performed, which haven’t, and which may not in the future. This transforms the annual review from a process banks do once a year, to something active and constant, connecting analytics to action.