Bank Credit Analysis Manual

Author: Goring
Publisher:
Publish Date: 2004-03-01
Features: In this "Bank Credit Analysis Handbook," Jonathan Goring lifts the veil on the language, concepts, and regional differences that affect banking, bank analysis, and bank ratings. He describes the role of bank credit analysis and explains the methods used in its practical application. It is a practical guide to the theory and practice of bank credit analysis and rating, citing cases from around the world (particularly those from Asia) to help readers gain a global perspective on the field of bank credit analysis. After introducing the writing process of this book, allow me to elaborate on its structure and how readers can maximize its utility. Chapter 1 addresses questions such as: Who can be called a "bank analyst"? What does a bank analyst do? Who do they serve? What are the different types of bank analysts? Chapters 2 through 15 are the core of this book. This section explains how to apply bank credit analysis, with the author outlining the process of bank credit analysis using a financial institution as an example. This part begins with financial statements and subsequently introduces the five key elements of the CAMEL model. The CAMEL model is the primary framework for evaluating a bank's performance and asset condition, laying the groundwork for discussions on risk management in subsequent chapters. Chapter 2 introduces the raw data required for bank credit analysis and provides a general overview of how to use this data for bank analysis. Chapters 3 and 4 elaborate on two very crucial financial statements: the "Income Statement" and the "Balance Sheet." In this section, the functions of these financial statements are detailed—these statements play fundamentally the same role in all business activities. Furthermore, in business activities, we need to learn to examine the "Income Statement" and the "Balance Sheet" item by item. One difference between bank credit analysis and corporate credit analysis lies in the "Cash Flow Statement," as the cash flow statement plays a very important role in corporate credit analysis but is less prominent in bank credit analysis. Chapter 5 introduces the CAMEL model and advanced or popular risk analysis processes worldwide. Chapters 6 and 7 discuss profitability analysis, with the letter "E" in the CAMEL model representing profitability. Chapters 8, 9, and 10 cover the quality of a bank's reputation, specifically the issue of bank capital quality. In Chapter 8, readers can learn about what constitutes a "non-performing loan" and why the existence of such loans is highly detrimental to a bank's development. This chapter also discusses the business cycle and its "product"—the credit cycle. Chapter 9 addresses the issue of asset quality, including a bank's credit (reputation) culture, the procedures for self-examination of credit, a bank's own credit analysis policies, and its loan portfolio. Chapter 10 explores the mathematical (numerical) analysis of ratios and explains how to use various indices for ratio analysis. Chapters 11 and 12 discuss the bank's reputation, which is often overemphasized but indeed very important: capital. Specifically, Chapter 11 explains the definition of capital and the uniqueness of bank capital, emphasizing that it differs from shareholder equity capital and regulatory capital (two concepts often confused). Chapter 12 reveals the meaning of risk capital and introduces the "1988 Basel Capital Accord" and its revisions in 1999. Chapters 13 and 14 were written by Darren Stubing. Darren is the Head of Bank Analysis at Capital Information, a professional bank rating agency. In this section, Darren Stubing specifically addresses the following questions: the liquidity of capital, why "capital liquidity" is crucial for a bank's development, and how to determine whether a bank's capital has good liquidity. In Chapter 13, he summarizes the techniques in interest sensitivity analysis and maturity gap analysis. Chapter 14 introduces the issue of funds and explains how to use various indices to analyze the liquidity of assets. Finally, in Chapter 15, a deep analysis is conducted on the role of "bank management" in maintaining and strengthening a bank's reputation, concluding the discussion on the CAMEL framework. After introducing the fundamentals of bank credit analysis, Chapters 16 through 27 shift the focus to a series of related issues. Among these, Chapter 16 (on "Risk Management") reveals the concentrated risks faced by financial institutions and the applicability of bank credit rating. Chapter 17 emphasizes the close connection between sovereign risk and banking risk, noting that to fully understand a bank or banking system, one must first grasp sovereign risk. Only by understanding the relationship between these two can one comprehend why countries regulate banks so strictly and why they often provide significant support to banks during crises. Therefore, in Chapter 18, the author shifts the focus to government financial regulation of banks. The characteristic of this regulation is "prudence." The text lists the most common types of prudent regulations, which often vary among countries. Chapters 19 through 23 discuss "distressed banks." Bank analysts in emerging markets are particularly interested in this topic, especially in the years following the Asian financial crisis, where this interest was very pronounced. Darren proposed a draft on this subject. Considering that this topic frequently appears in news media, particularly in Asian countries, we expanded it, and I believe this is necessary. Chapters 22 and 23 cover bank restructuring: what it is, why it is done, and the typical methods for restructuring. Chapter 24 discusses methods for capital structure adjustment, while Chapters 25 and 26 highlight experiences that have greatly impacted Asian countries. Chapters 24 and 25 also cover the rating industry, particularly how it rates banks. Chapter 24 provides an overview of the development of the rating industry, its role in the financial sector, its service pricing, and the reasonable research and rating services it provides. Chapter 25 includes a guide to rating terminology, helping readers understand rating designations (such as Aaa, BB) and enabling them to make comparisons when these are used to represent bank credit ratings. The text also briefly discusses the rating methods of Thomson BankWatch (before it was acquired by another rating agency, it was the world's largest professional bank rating agency). Chapter 26 provides a brief introduction to fixed-income security analysis for banks. Andrew Seiz, a graduate of BankWatch and currently a fixed-income analyst at Goldman Sachs, contributed this chapter. Finally, it should be noted that without the advent of the internet era, no book on bank credit analysis could have been published. This book references internet literature extensively, so in Chapter 27, I briefly introduce how the internet has influenced the development of banking and bank reputation.