Lecture Materials LOAN PORTFOLIO MANAGEMENT YEAR 1. George E. Ruth Rosemount, Minnesota

Transcription

1 Lecture Materials LOAN PORTFOLIO MANAGEMENT YEAR 1 George E. Ruth Rosemount, Minnesota gruth_1@yahoo.com August 9, 2017

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3 1 LOAN PRICING Part Two August 9, Current Environment Pricing individual loans by product Examples of current models Role of competition Risk rating Pricing adjustments Value selling based on service and cost 1

4 3 Consumer Loan Pricing Primary components: credit score, loan-to-value, and debt-to-income Matrix based on type and term Challenge: good customer, good commercial or agriculture customer Indirect lending verses direct lending Fair Lending 4 Fixed verses Floating Closed end personal purpose usually fixed Open end home equity floating Adjustable rates and risk How often are fixed rates reviewed? Can not compete with dealers, others with different sources of funding 2

5 5 Home Equity Lines of Credit Monitor Usage Monitor Credit Scores If renewal, origination date, usage, and length of renewal Portfolio stress analysis: rate, term out, decline in collateral 6 Applying a Pricing Model Not efficient to model every consumer loan Model all loans over $xxx Sample other loans Model portfolio by segment Understand RAROC, ROA, and ROE Challenge: seen as commodity 3

6 7 Commercial and Agriculture Usually what the lender can negotiate Pressure currently for long term fixed rates Stress testing floating rates at origination 8 Floating Rate Indexes National prime rate Bank established prime or preferred rate Five year treasury Federal Home Loan Bank rates Do indexes reflect your bank s cost? 4

7 9 Floating rate loans Stress test at origination Need to stress cash flow and interest rate together Need to increase rate sensitivity in rising rate environment Increases credit risk More difficult to sell today 10 Variables Origination fees for real estate Documentation or administration fees Non-use fees for lines of credit Other real estate fees Account relationship- if so, how do you monitor? 5

8 11 Relationship Pricing Loan Deposits Other services- debit cards, credit cards, letters of credit, insurance, trust, etc. 12 Relationship Pricing If banks competitive difference is really service, sell based on how your service is different Be able to explain benefits of your bank and the value Are you a Walmart bank? 6

9 13 Role of Competition If client states, have better offer from another lender? When do you match rates? Need to know if comparing apples and oranges! Understand your banks price verses competitors 14 Risk Rating Habitually past due loans Loans rated watch or below Can raising the interest rate, which decreases cash flow and increases credit risk help a problem borrower? Can you charge enough for a substandard credit? 7

10 15 Pricing Models Use to understand bank profitability Build a possible profit model for a transaction Understand how effective your bank pricing model is to bank profit Identify alternatives for customer if pressure to lower interest rate 16 Model Variables Amount of the loan Amortization and term Origination fees Average account balances ( loan agreement to maintain) Other service fees ( loan agreement to use services) Pricing if accounts moved to another bank 8

11 17 Internal or External Model Must measure RAROC, ROA, and ROE Set a hurdle- if below who can approve? Need to change variables as environment changes do not leave static! 18 Pricing Summary Balance model, art, and science Need loans- profitable loans or profitable relationships Know your competitions pricing 9