THE CREDIT
ANALYST
Corporate Credit and Financial Analysis
Uday Saraf
ROAD MAP
The Universe of Credit Analyst
Scope and Responsibilities of credit analyst
Credit Analysis: Tools and Methods
Requisite data for Credit Analysis
Using Financial Statements
THE UNIVERSE OF CREDIT
ANALYST
Job Descriptions of Credit Analyst
Distinction between Risk Management and Investment
Selection roles
Structured Finance Credit Analyst
Roles of credit analyst as per the analysis universe
JOB DESCRIPTION OF
ANALYST
Consumer Credit
Focused on retail consumer loans and credits, junior level position
Process involves appraisal of documents as per scoring criteria
Credit Modelling
Focused on development of consumer credit scoring systems
Process involves development, testing and maintenance of scorecards
Corporate Credit
Focused on analysing corporate entities and building a risk model
Daily work involves credit modelling and committee presentations
Counterparty Credit
Focused on monitoring exposures to counterparties and approve credit
limits
Process includes detailed capital structure and financial statement
analysis
Role: Risk Management
Role: Investment
Management
Evaluate credit which is part of
a larger risk management
function
Find and recommend
investment opportunities in
debt securities
Objective is to
evaluate/manage credit risk
Objective is to find investments
to earn a return
Research prospective
customers and counterparties
Compare ratings/scores within a
particular asset class
Prepare credit reports for
internal use
Focus is on the relative
desirability of an asset
Recommend transactions on
the basis of risk limits
Recommend transactions on
the basis of risk and return
trade-of
Provide unbiased analysis of
credit quality for issuers
Credit Ratings
Represents a very small
population of the credit analyst
universe
CORPORATE CREDIT
ANALYST
Universe includes industrial enterprises, trading firms,
and service providers
Analysts have specialization on sectors/industries
An analysts might need to put more efort in assessing
credit worthiness of small and medium enterprise vis a
vis a listed issuer
Understanding of cash flows is very critical component in
evaluating credit worthiness of corporate entities
BANK AND FINANCIAL
INSTITUTION ANALYST
Bank and financial institutions creditworthiness is
generally assessed when they are counterparty to a
transaction
Banks generally hire these analyst, known as
Counterparty Credit Analyst
They assess credit risk due to a transaction and its
settlement risk*
They might decide on a limit of total exposure to
particular counterparty
This exposure limit is critical in extending further credit
*TYPE OF TRANSACTIONS
Financing or burrowing either through interbank market,
repos & reverse repos, lending/burrowing securities
Factoring, forfaiting and forfeiting
Holding and trading of debt securities of other companies
Foreign exchange related dealings
Arranging and participating in other derivative
transactions
Holding or participating in securitizations or structured
finance
Custodial and settlement services
STRUCTURED FINANCE
CREDIT ANALYST
Structured finance refers to the advance of funds secured
by certain defined assets or cash flows
Additional layer is created due to existence of Credit
Derivatives or Special Purpose Vehicle (SPVs)
The credit risk is not merely analysis of the issuer or
borrower
Credit risk of such products is a function of,
Manner in which assets and cash flows are assembled
Probability of arrival of underlying cash flows
SOVEREIGN/MUNICIPAL
CREDIT ANALYST
They assess the risk of default on borrowings by
sovereigns/countries and municipal organizations
Analysts appraise the broader risks arising from
transactions which inter and intra country
Along with financial statements of borrowers, large focus
is put on macroeconomic indicators and political factors
There is a significant correlation between sovereign credit
risk and bank operating in the economy
Debt issued by sovereigns form large part of investments by
banks
Banking system in a country face a systematic risk, sovereign
risk a subset of this systematic risk
ORGANIZATIONS HIRING
CREDIT ANALYSTS
Banks and related financial institutions
Asset Owners
Rating Agencies
Government agencies
SCOPE AND
RESPONSIBILITIES OF
CREDIT ANALYST
Counterparty Credit Analyst
Banks primary business is to retain credit risk
Source of credit risk are lending, trade finance and foreign
exchange transactions
They would conduct internal credit review and set prudent
credit limits
Using of credit risk mitigants including covenants
The role may involve approving of excesses over permitted
limits
Lending decision is a function of impact of transaction on
borrower, risk mitigants and obligation of the borrower and
its risks
Fixed Income Analyst
There exists an additional responsibility of making buy/sell
recommendations
CREDIT ANALYSIS: TOOLS
AND METHODS
The goal is to ascertain the magnitude of credit risk
Process includes,
Gathering information
Formatting data
Peer Comparison
Reach conclusions
The methods used by credit analysts are
Qualitative and quantitative analysis
Macro and Micro analysis
QUANTITATIVE AND
QUALITATIVE ANALYSIS
Comparison of financial indicators/ratios,
Percentage rates of net profit growth
Debt coverage
Cash flows/sources of funds
Non-numeric Attributes afecting Probability of Default
(PD)
Quality of management
Geographical location
The Cross-product
A final conclusion on credit rating/score can only be arrived at
after combining the two analysis together
MACRO AND MICRO
ANALYSIS
Micro Analysis
Financial Performance
Financial condition
Quality of Management
Macro Analysis
Growth in economic activity
Market/sector/industrial analysis
Political environment
An analysts needs to also strike a balance between
primary and secondary source of data
REQUISITE DATA FOR
CREDIT ANALYSIS
Annual Report
Auditors report and statement
Auditors expertise/reputation in scrutinizing the enterprise
Auditors opinion clean or qualified
Change in auditor if any reasons for this
Financial statements: past and present
Statement of funds/Balance Sheet including of Balance sheet
items
Income statement/Profit and loss statement
Cash Flow statement/Source and use of funds
Economic Data
Subjective to analysis universe
The more the recent data is available, better is the
analysis
USING FINANCIAL
STATEMENTS
Re-arranging the financial statements in a particular
format
Comparison of financial information
Standardisation in calculation of ratios
Rating Agencies/banks depends on down-end data teams
and external vendors to get the above data in a format
For example, Standard & Poor's, uses an internal system
named CreditScope as a pre-specified format for
spreading
OTHER RESOURCES
Website of the organization under analysis
News, Internet, data providers like Factivaa, Bloomberg,
Reuters
Prospectuses and Ofering Statements
Reports published by other agencies, like regulators, etc.
REFERENCE
Chapter 2 - The Credit Analyst, Jonathan Golin and
Philippe Delhaise, The Bank Credit Analysis Handbook
