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CREDIT ANALYSIS

CREDIT ANALYSIS. TOB Lecturing notes no 4. Lecture outline. Objecives of CA Process of CA The five C’s Information sources for CA Credit application structure Classification of credits. Credit analysis - objectives. Identify the risks in lending situations

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CREDIT ANALYSIS

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  1. CREDIT ANALYSIS TOB Lecturing notes no 4

  2. Lecture outline • Objecives of CA • Process of CA • The five C’s • Information sources for CA • Credit application structure • Classification of credits

  3. Credit analysis - objectives • Identify the risks in lending situations • Determine the company’s debt service capability • Make recommendations as to proper type and structure of the loan

  4. Credit granting process • Application - gather preliminary information. • Investigation - verify preliminary information and gather additional information. • Credit decision - consider facts and make decision to accept or decline. • Loan Close.

  5. The five C’s – THE BASIC COMPONENTS • Character • Capacity • Capital • Collateral • Conditions

  6. Risks analysis • Identify the risks • - business risk • - performance risk • - financial risk • - management risk • Evaluate the risks • Mitigate the risks

  7. Sources of information • Customer interview • Internal sources • External sources

  8. General format of an analysis • Description of the loan • Description of the company • Credit history • Analysis of the Market/Industry • Financial Analysis of Borrower • Cash Flow and Projected Cash Flow Analysis • Collateral analysis • SWOT analysis • Credit scoring • Credit Decision

  9. Description Of The Loan • Purpose • Amount • Repayment Source • Terms • Security

  10. DESCRIPTION OF THE LOAN • Type, amount, period: “investment credit” of 180,000 EUR on a period of 3 years. • Objective: acquiring a printing equipment “Presse offset Heidelberg Druckmachine”, whose total value is 212,000 EUR • This equipment will be financed in the following way: • - 15% from the equipment price will be paid by the client(10% from the value has already been paid as advance money ) • -85% (180,000EUR) through the requested credit • The credit will be guaranteed with 1st rank mortgage on building and land in total area of 7800 sqm situated in Bucharest. The accepted value of the collateral is 196,500 EUR. • Till now all the company’s investments were made from its own funds and had as objective the permanent improvement of the printing equipment. This led to the increase of the quality of the products and an increase in the number of customers. • In March 2003 the company acquired a real estate building in Constanta - 5.412 bill ROL acquisition price which spent all the internal fund needed for acquiring the printing equipment. • The reimbursement of the loan will be made monthly in equal installments, according to a schedule previously decided by both parties • The source of the reimbursement is the monthly cash flow of the company.

  11. Description of the company • General issues (type, history, goal and operations) • Ownership structure • Management description • Production technology • Product analysis • Costing and pricing • Future development and strategy

  12. DESCRIPTION OF THE COMPANY Company History • Printing House joint stock company was set up in 1993 and has as main activity: printing, coping. Its Social capital is 2 126 000 000 ROL. Ownership and management structure Main shareholders: Costel Mihai holds 58%, Diaconu Raluca holds 33%, Radulescu Cosmin holds 5%, Popescu Dan holds 2%, Damian Andrei holds 2% • Printing House has a dynamic management team composed of highly qualified professionals with strong capabilities in their filed of activity. Three of the shareholders are also in management positions. • The market strategy of Printing House Joint Stock Company’s highlights the quality of the products. The company has also a price strategy by offering discounts (cash discounts, quantity discounts) Description of the company’s activity and technological process • The main activity of the company is printing. The company is a full service printer including all the phases of the production: pre-press, printing and finishing. It prints all kind of materials such as newspapers, magazines, books, brochures, labels, forms, packages, business cards, calendars etc. The technological procedures are complex and have the following stages: • 1. Typing: graphical conception, paging, correction, film listing. • 2. Editing of the imagines and coping them on aluminum slate • 3. Printing with special equipment: 10,000 pages/hour, automotive ink • 4. Sorting, cutting, biding, counting and wrapping. The company has a team of 123 employees. Subsidiaries and Related Business • On January 2004 set up a new branch in Sibiu. The company from Sibiu has the same activity but is independent from the one in Bucharest.

  13. Credit history • Payment information about all types of accounts • Relations with other banks or financial institutions • Checking the Credit Information Bureau Database and Payment Incident Bureau database • Reports of events such as bankruptcies, judgements, suits etc • Details on late or missed payment • Number of accounts with no late payments

  14. CREDIT HISTORY Banking Relationships Till now Printing House hasn’t had any relation with Raiffeisen Bank. The banks the company is working with are: BCR Current account 2,168,418 BRD Current account 1,680,748 ALPHA BANK Current account 159,353 History of the Client’s Loans Printing House Joint Stock Company doesn’t have any long-term loan, all the company’s debts and investments being made from its internal sources. It has only 2 leasing contracts: Financial Leasing Monthly Payment Date Maturity Date Balance Audi A4 full options 1028 EUR February 2003 January 2005 26,298 EUR Renault magnum 590 EUR June 2002 April 2005 12,011 EUR Credit Information Bureau Database According to the Credit Information Bureau statement, Printing House Joint Stock Company is not present in database with any unpaid loans. Payment Incident Bureau Database According to the Payment Incident Bureau statement, Printing House Joint Stock Company is not present in database with any incident. Taxes, Social Insurance to State Budget Printing House Joint Stock Company has paid all its debts to the state budget.

  15. Analysis of the market/industry/economy • Market - market structure - market size - demand for the product

  16. Analysis of the market/industry • The Romanian printing industry has been one of the most dynamic sectors of the economy in the last decade. Until 1989 in Romania there was only a printing house, the former Tipografia Casa Scanteii, over 1000 companies which have as main object the activity of printing.

  17. The market analysisThe Dynamic Forces of the Market Competitors Suppliers customers Entry Barriers COMPETITION Suppliers Customers Company Substitute products

  18. Main competitors • Infopress • Mega Press Holding • Libedi Printing, • Fed Print • Imprimeriile Media Pro - IMP

  19. Company’s suppliers Product % in total Payment Payment Acquisition suppliers term (days) method frequency DormanSRL Services 4.16 30 Payment order monthly SC.RTC S.A Paper 15.7 45 Payment order monthly ImobConstanta Assets 23.5 - Payment order Kubera SA Paper 7.12 60 Payment order once to months ArhiDesignSRL Consumables 10.3 45 Payment order monthly PrintManSRL Utilities 2.65 45 Payment order monthly SilverInkSA Ink 8.93 30 Payment order monthly EuropapierSA Paper 11.66 45 Payment order once to 3-4months Others Others 15.98 30-60 Payment order seldom

  20. Main customers Customer Product Payment Payment Acquisition term (days) method frequency 1.Humanitas School books 60 Payment order monthly 2.Adevarul newspaper 15 Payment order monthly 3. SNCFR Booklets, folders, 30 Payment order monthly train schedule 4. Metro SA promotional materials 30 Payment order/Cash monthly 5. Elite SA promotional materials 45 Payment order/Cash monthly Romania labels 6. Editura Niculescu Books 60 Payment order monthly 7. Ioana, Mama magazines 45 Payment order monthly 8. Petrom SA envelops 30 Payment order monthly labels, packages

  21. Industry/economy overview • Rate of industry growth • Life cycle • Industry development and trends • Risks related to the industry • Economic policy • Government action • Trends of inflation, unemployment, purchasing power

  22. Company’s Market Position • Due to the quality of the products and seriousness to its clients, the company succeeded in becoming a well-known company on printing market.

  23. Swot analysis • Stenghts • Weaknesses • Opportunities • Threats

  24. SWOT ANALYSIS • Strength • management experience and teams of professionals • good position on the market • long term relationships with the suppliers • ability to pay debts on time • Weaknesses • negative cash flow in 2003 • the company doesn’t have as activity publishing • Opportunities • increase and consolidation of the market share by the new investment • development of the printing sector in Romania • development of the school books following the new regulations of the Education Ministry • Threats • legislative changes • strong competition in the field • appearance on the market of new printing houses with improved technology

  25. Collateral analysis • Types • Characteristics/Features - marketable • ascertainable • stable • transferable • Valuation

  26. COLLATERAL ANALYSIS • The credit will be guaranteed with 1st rankmortgage on real estate -building and land in total area of 7800 sq. situated in Bucharest. The assets are owned by the Printing House Joint Stock Company. • The market value of the collateral is 262,000 EUR. To this value the bank applies a risk coefficient of 25% resulting the accepted value of the collateral of 196,5000 EUR • The value of the collateral cover the amount of the total loan agreement (the loan amount, the amount of interest rate payable in the course of the 1st year), and the expenses related to the collateral enforcement .

  27. RISK EVALUATION • KEY RISKS MITIGATION FACTORS • Business Risk Company’s management has experience in this domain, and the company extended its activity quickly. • Market Risk The general economic growth will determine also the development of printing activity. By renewing the printing equipment, the company will adapt quicker to market needs and will succeed in maintaining its position on the market • Repayment riskGood financials, good reputation, ability to pay debts on time • Foreign exchange riskThe profit margin obtained by the company will cover the unfavorable differences of the foreign exchange.

  28. Financial analysis of the borrower • Liquidity ratios • Solvency ratios • Profitability ratios • Efficiency ratios • Cash flow analysis, turnover evolution etc

  29. Financial analysis of the borrower. Evolution of the turnover • In terms of turnover, 2003 was good year for the company, the increase representing about 21,9% as compared to 2002. There is a seasonally in the turnover in the second half of the year due to the selling of schoolbooks. Only a small part of the turnover is due to the exports. The decrease of the turnover during the 2002 compared to 2001 is due to the repair of old equipment, which implied both expenses and activity stagnation due to non-working machines.

  30. Current ratio • Current ratio = Current assets/Current debts • Criteria Evaluation • >1,5 x 1 • >1,2 x 2 • >1 x 3 • >= 0,8 x 4 • <0,8 x 5

  31. Solvability • Solvability = Total assets/total debts • Criteria Evaluation • >1,5 x 1 • >1,2 x 2 • >1 x 3 • >= 0,8 x 4 • <0,8 x 5

  32. Operating profit margin • Operating profit margin = Operating profit/ sales x 100 • Criteria Evaluation • >10% 1 • >7% 2 • >3% 3 • >= 0% 4 • < 0(loss) 5

  33. Interest cover • Interest Cover = Operating profit/ Interest expenses • Criteria Evaluation • > 4 x 1 • >3 x 2 • >2 x 3 • >= 1x 4 • < 1 x 5

  34. Equity ratio • Equity ratio = Total Equity/ Total Assets • Criteria Evaluation • >35% 1 • >20% 2 • >10% 3 • >= 0% 4 • < 0% 5

  35. Credit scoring • Qualitative criteria (management quality, business strategy, collateral received) • Quantitative criteria (current ratio, solvability, operating profit margin, interest cover, equity ratio)

  36. Credit scoring

  37. Financial performance • Client’s mark Client rating- financial performance • 1,00-2,00 A • 2,01-3,00 B • 3,01-4,00 C • 4,01-4,50 D • 4,51-5,00 E

  38. Credit decision • After analyzing the financial situation of the company, the score determines the credit grade : • A: 4.20-5.00 or 1.00- 2.00 • B: 3.40-4.19 2.01-3.00 • C: 2.60-3.39 3.01-4.00 • D: 1.80-2.59 4.01-4.50 • E: 1.00-1.79 4.51- 5.00

  39. According to the observance of the reimbursement terms • -current loans- there are not at maturity or the installments were paid in due time according to the stipulations of the contract; • -loans with deferred payments-the due installments and the related interests were not paid within 30 days after maturity; • -due loans-the payments of the credit installments and the related interests exceeded more than 30 days;

  40. Credit classification according to the risk • Following the valuation of the customer’s financial performances, the credits will be included in of the following classes: • Class A - borrowers with profitable activities and solid financial activities, with no problems in returning the loan • Class B - borrowers with good financial standing at present, but who cannot maintain it in the next period • Class C - borrowers with satisfactory economic position but with a tendency of worsening their economic efficiency and financial ratios • Class D - the economic and financial standing is characterized by inferior ratios and varying activities between satisfactory and unsatisfactory • Class E - borrowers with unprofitable activity, involving uncertainty in repaying the loan

  41. Category of the credit

  42. CREDIT COMMISSION DECISION • Credit Commission approved the “investment credit” in the following conditions: • Credit type: “investment credit” • Purpose: acquisition of printing equipment Presse offset Heidelberg Druckmachine • Amount: 180,000 EUR • Interest: 8.2% • Collateral: 1st rank mortgage on building and land; • Contracts date: March 2004 • Maturity date: February 2007 • Other conditions: • -The company won’t apply for other credits without the written approval of Raiffeisen Bank • -The company will carry on at least 75% of the payments through Raiffeisen Bank • -The company won’t pay dividends and the shareholders won’t withdraw moneys without the written approval of Raiffeisen bank. • In the case the company doesn’t fulfill one of the above conditions, Raiffeisen Bank has the right to increase the interest with 2% or to consider the contract null and to demand the payment in advance for the obligations.

  43. References • Dima.M. A, Agapie, A., Orzea, I., Moroianu, M. (2010). Banking. Theory, cases and applications, Ed ASE • Dima, M.A., (2010), Credit Analysis. Case studies, Ed. Business Excellence • Casu, B., Giraradone, C., Molyneux (2006). Introduction to Banking, Prentice Hall • Mishkin, F. (2007). The Economics of Money, Banking and Financial Markets, Prentice Hall

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