LO 17.3: Describe the quantitative, qualitative, and research skills a banking credit

LO 17.3: Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have.
Quantitative skills are necessary to assist in determining the ability of the entity to repay debt. A banking credit analyst must be able to read and interpret financial statements in order to perform a wide range of ratio analysis. The ratios to be analyzed depend on which measures of financial performance are relevant (i.e., liquidity, solvency, profitability). For example, return on equity (ROE) is a commonly used measure because it considers efficiency and leverage in addition to profitability. Because of the standardized nature of financial performance measures, peer analysis (i.e., comparison with similar banks and financial institutions) is possible and can be used to compare financial results.
Analysts must also understand statistical concepts (e.g., sampling, confidence intervals, correlation) in order to properly interpret data to arrive at reasonable conclusions under uncertainty. An example of a statistical analytical tool would be trend analysis (comparison of current year performance to past performance). The ability to analyze asset quality is also important. For example, a banking credit analyst could quantitatively assess a banks loan portfolio by computing nonperforming loan ratios. Finally, analysts should have an understanding of monetary policy and an ability to compute and interpret macroeconomic data (e.g., GDP growth rates), both of which impact the general banking industry.
Qualitative skills are necessary to assist in determining the willingness of the entity to repay debt (e.g., reputation, repayment track record). It is critical for analysts to think beyond numbers and apply considerable judgment, reasoning, and experience in determining which factors are relevant for making decisions (e.g., management competence, banks credit culture, and the robustness of credit review process).
The ability to analyze the quality, reliability, and consistency of reported earnings is also necessary. In addition, an understanding of the regulatory environment of banks and the impact(s) of any regulatory changes is important (e.g., central bank given more authority to regulate banks).
An analyst should have basic research skills in order to analyze an unfamiliar banking sector. Some preliminary research on overall sector structure, sector characteristics, and nature of regulation should be performed first. Then a reasonably detailed review of the largest banks followed by smaller banks may be performed. Examining larger banks first provides a basis of comparison when subsequently looking at smaller banks. After gaining a
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Topic 17 Cross Reference to GARP Assigned Reading – Golin and Delhaise, Chapter 2
thorough understanding of the banking sector, a bigger-picture perspective might be taken. For example, an analyst might try to research the countrys entire banking sector, making note of the dominant entities and their impact on the sector.
A rating agency analyst would most frequently utilize primary research skills while a counterparty credit analyst would most frequently utilize secondary research skills.
Primary research skills include detailed analysis of (audited) financial statements for several years together with annual reports and recent interim financial statements. In addition, the rating analyst would usually need to make one or more due diligence visits to the bank to meet with senior management to discuss operational and business strategy. In addition to the visit, a questionnaire may also be provided to management to complete and return to the analyst.
Secondary research skills involve using the research published by others (e.g., rating agencies). The counterparty credit analyst would not make frequent visits to banks. Any site visits would tend to be brief and focused on very specific areas.
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