www CUFA ie Credit Union Financial Analytics Ltd 26 July 2013 Presentation To FMB Group Background ECM Analytics Research started in 2002 First Desk Top Applications in 2005 Irish Permanent ID: 1046951
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1. Empirical Credit-Risk Management (ECM)www.CUFA.ieCredit Union Financial Analytics Ltd26 July 2013Presentation ToFMB Group
2. Background – ECM AnalyticsResearch started in 2002First Desk Top Applications in 2005Irish Permanent tsbBank of Ireland FinanceFirst Credit Union in 2011Tullamore Credit UnionNow operating in nine Irish Credit UnionsPh.D completed in 2012 by Dr Patrick Shallow at CreditExpo, Nova UCDIn parallel:The Global Banking Crisis took placeIFRS thinking is moving from “incurred loss” to expected loss” accounting.
3. Traditional Spread Sheet Loss Forecasting for Retail Credit RiskDeficiencies:Rates are Generic, Fixed, InaccurateWell-Performing Portfolio risk not identified Months in ArrearsLoss Forecast %
4. Y6(1.5k)Y5(1k)Y13.5kY22.7kY40.5kY31.3kRecognition Income/Loss€8,000(€2,500)Traditional Mismatch of Income and Risk RecognitionIncome and Credit RiskProfit Illusion
5. 100%50%0%012369124578101190%80%70%60%40%30%20%10%100%= Resolution 49Comparison of Provisioning Approaches / Loss Probabilities %Months% LossForecast10%40%20%60%80%10%20%40%100%60%= Roll Rate Provisioning
6. ECM Analytics – What it doesExpert Management System measuring retail credit risk objectively Statistical and Mathematical modelExperience-based AnalysisIndividualised to LenderStandardised MethodologyBased on the Lender’s own most recent experience.
7. ECM Benefits for Credit UnionsReduces Bad Debts – by Risk AvoidanceImproves Loan Quality – by Risk MitigationImproves Loan Margin – by Appropriate PricingImproves Executive Performance – by providing Objective AnalysesFocuses and Directs Credit Control Activity, including developing arrears trendsCompliant Reporting of Provisions and Loan Reviews
8. ECM Analytics – Some ClientsLombard & UlsterCredit UnionsBank of Ireland FinanceConsulting:ECM Analytics Installations:Credit UnionsReviewing AuditorsKPMG, PwC, FMB, MSN, Whelan Dowling, etc.Blackrock Consultants (during Bank stress testing)Tullamore Bray, Cuchullain Tallaght West Prison Services DundalkSt. Dominic Navan ESSCU (in delivery)
9. Y6(1.5k)Y5(1k)Y13.5kY22.7kY40.5kY31.3kRecognition Income/Loss€8,000(€2,500)Traditional Mismatch of Income and Risk RecognitionIncome and Credit RiskProfit Illusion
10. Y1Y2Y4Y3RecognitionIncome & Risk€2.5k€0.3kSynchronising Risk Recognition with Income Reporting – using ECM AnalyticsIncome and Credit Risk3.5k2.7k1.3k0.5k1.0k0.8k0.5k0.2k€1.9k€0.8k
11. ECM AnalyticsTop-DownAnalysis
12. ECM Analytics - InputsLoan characteristics and loan histories Recovery and Write-off data (LGDs)Portfolio Age, Maturity and Rate of Attrition - To calculate Well-Performing Portfolio riskPortfolio Data&Write-offsECM AnalyticsLoss Forecasts&Provisions
13. ECM Analytics - OutputsMacro Portfolio and Sub-PortfoliosLoss Forecast and ProvisionsTrends - short, medium and longer termPricing, with Risk PremiumsAnalyses by e.g. car loans, home improvement, students ,maturity, value bands, etc.Micro Portfolio Analyses Characteristic combinationsRisk PricingLoan ReviewAccount level analysesAge & Maturity AnalysesWell-Performing and Arrear loans
14. Loan PortfoliosLoan MaturitiesLoan OfficersRescheduled LoansArrear AgesBranch PerformanceSelected OthersNew Lending PolicyCredit ControlPolicyRisk Rating & Ideal PricingPriorities &PerformanceECM AnalyticsManagement InformationCredit Union Data
15. Loss Forecasts and Loss ProvisionsMonthly Analyses of All Loan CharacteristicsRisk Trend Analyses – 3, 6, 12, 18 monthsRolling Micro Portfolio Analyses with Risk PricingTracking & Analysis of Arrear MigrationsMarked-to-Market Asset Values (where relevant)Measures Risk in the Well-Performing PortfolioECM Analytics Unique Features
16. ECM Analytics delivers:Reduced Bad Debts – Improved Business ViabilityDistinguishes Risk and Loan “Hot Spots”New Lending Targeting and Risk PricingDirects marketing focus towards lower risk lendingFocused Credit Control ActivityRisk adjusted exposuresPerformance ManagementTracks Underwriting and Credit Control performanceRisk Trend Analyses – Macro & Subsidiary PortfoliosTimely and Accurate Compliance Reporting Benefits
17. 100%50%0%012369124578101190%80%70%60%40%30%20%10%101%100%= Resolution 49Comparison of Provisioning Approaches / Loss Probabilities %Note: The shape and significance of the ECM Analytics curve will depend on the experience of each individual Credit Union. Months% LossForecast10%40%20%6.5%60%80%10%20%40%100%60%= Roll Rate Provisioning= ECM Analytics - Specimen Community CU Comparison= ECM Analytics - Specimen Industrial CU Comparison
18. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840k
19. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840kRes.490%0%10%10%20%20%40%Res.490070k50k80k60k1,056k1,316k
20. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840kRes.490%0%10%10%20%20%40%Res.490070k50k80k60k1,056k1,316kRRP0%0%10%20%40%60%80%RRP0070k100k160k180k2,640k3,150k
21. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840kRes.490%0%10%10%20%20%40%Res.490070k50k80k60k1,056k1,316kRRP0%0%10%20%40%60%80%RRP0070k100k160k180k2,640k3,150kECM6.54%22.33%33.72%53.18%55.89%93.88%97.80%ECM981k290k236k265k223k281k2,582k4,858k
22. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840kRes.490%0%10%10%20%20%40%Res.490070k50k80k60k1,056k1,316kRRP0%0%10%20%40%60%80%RRP0070k100k160k180k2,640k3,150kECM6.54%22.33%33.72%53.18%55.89%93.88%97.80%ECM981k290k236k265k223k281k2,582k4,858k
23. Sample Comparison ForecastsCurrent1 month2 Months3 Months4 Months5 Months6 MonthsTotal%Actual15,000k1,300k700k500k400k300k2,640k20,840kRes.490%0%10%10%20%20%40%Res.490070k50k80k60k1,056k1,316k27.1%RRP0%0%10%20%40%60%80%RRP0070k100k160k180k2,640k3,150k64.8%ECM6.54%22.33%33.72%53.18%55.89%93.88%97.80%ECM981k290k236k265k223k281k2,582k4,858k100.0%
24. ECM Analytics delivers:Reduced Bad Debts – Improved Business ViabilityDistinguishes Risk and Loan “Hot Spots”New Lending Targeting and Risk PricingDirects marketing focus towards lower risk lendingFocused Credit Control ActivityRisk adjusted exposuresPerformance ManagementTracks Underwriting and Credit Control performanceRisk Trend Analyses – Macro & Subsidiary PortfoliosTimely and Accurate Compliance Reporting Benefits
25. ECM AnalyticsMike KitchenChairmanRalph SwobodaManaging DirectorPintu JacobIT DirectorDeclan MooneyCommercial Director