Using data analytics and credit intelligence to sift through the mud to find the gold
Sean Hunter | CIO, OakNorth
April 8, 2021
A question I am often asked is how businesses can grow with confidence. The answer I often give is for businesses to really focus on their own strengths to help enable growth.
This is exactly what we’re doing at OakNorth, using our expertise in data analytics and ‘Credit Intelligence’ to redefine commercial lending to the Missing Middle – businesses who are the most significant contributors to economic and employment growth.
Firstly though, let’s take a step back to realize that when it comes to commercial lending, one of the factors that has been especially interesting to observe over the last 12 months is how historic correlations have broken, simply meaning the old ways of lending just don’t work anymore.
The only way to course-correct for “the new normal” is to take a fundamentally different approach to commercial lending than what’s been done for decades.
When looking at business data, typically a lender might get performance or financial data from a borrower on a quarterly or bi-annual basis, but of course in this day and age, a lot can change in these time periods.
The only way commercial lenders can effectively assess credit risk for businesses in these times is by using multiple data sources to fill in the gaps – including what may be unconventional or previously unavailable – rather than just relying on what they’ve used in the past.
For example, if you’re looking to lend to a restaurant, you can look to use the likes of Open Table, who house reservation data for various restaurants, giving you a strong sense of how severely individual restaurants in a particular location are impacted by lockdown. Furthermore, the great thing to realize about using this type of unconventional data source is that it reacts in a very timely fashion, so when the process of lockdown changes and restaurants open again, this is immediately reflected.
This is why I’ve always been a strong believer that data analysis is a vital cog in commercial lending because in doing the analysis, you’re able to sift through the mud to find the gold.
Looking to the future, we’re also strong believers that banks are going to have to combine backward-looking data with a forward-look view, as well as take a granular, loan-by-loan approach rather than an overall portfolio or sector-level approach to credit analysis. It isn’t enough to use old historical models or broad categorization as lenders need to be much more concrete, much more specific about each lending situation and that means using more specific, granular data and more specific modeling, so you can make more good decisions going forward.
The OakNorth Credit Intelligence Suite enables lenders to do just that – to look forward, not just backward, helping them get ahead of borrower financial hardship, industry-driven risk deterioration, and covenant breaches – thereby enabling the monitoring of loans with the same rigor used in underwriting. In other words, the bank is able to lend smarter, lend faster and lend more.
Read the full article here.