Credit Analysis & Credit Process

About the Course

The course begins with an overview of the need for credit by firms and the basis for the credit analysis. It then focuses on leverage as understanding how it impacts a business is key to decoding how it will perform under times of stress. Two different instances of leverage – operational and financial are discussed and explained in detail with worked out examples. Associated calculations for contribution margin, break-even point and margin of safety are also demonstrated. The degrees of combined leverage, an interesting concept that allows you to measure the impact on earnings for every dollar increase/decrease in sales, is also defined.

Next the course outlines the credit analysis process and presents examples of resulting factors to consider in credit proposals and memorandums. This includes a review of the business and the business model including its current stage. A review of the industry outlook to give an indication of external pressures on the business in future years as well as at the time of repayment. The profile of the client include market repute, history and existing credit relationships. An analysis (including projections) and interpretation of the financial statements. Finally a detailed and in-depth analysis of the ability of the business to generate cash and how that cash has been used in the past.

The course also outlines the role of the loan officers, the core questions that credit committees take into consideration in arriving at their decision and the key components of the final credit decision.

Learning Objectives

After taking this course you will be able to:

• Define leverage and its importance
• Clarify the trade-off between risk and return with respect to leverage
• Defined and differentiate between fixed and variable costs
• Describe the terms “Cost Function” and “Relevant range of production”
• Explain and calculation the concepts of Contribution Margin, Break Even Point (BEP) & Margin of Safety
• Describe the alternative way of calculating the degree of operating leverage
• Discuss how the degree of operating leverage and contribution margin are related
• Discuss how the degree of operating leverage and BEP are related
• Illustrate the upside and downside of a high level of operating leverage
• Define the degree of financial leverage and explain why it is used
• Describe the alternative way of calculating the degree of financial leverage
• Illustrate the upside and downside of a high level of operating leverage
• Breakup Return on Equity into its various components
• Explain the equity multiplier effect on Return on Equity
• Calculate the Degree of Combined Leverage
• List the questions that a credit analyst needs to answer regarding a potential client
• Define intent and how it can be assessed
• Describe underwriting, classification, pricing and fit with regard to the decision to take on a risk
• Elaborate on the reasons for a firm to borrow money
• Elaborate on the potential repayment sources available to firms
• Interpret a firm’s financial statements & current profile to assess its borrowing need and repayment potential
• List and describe products available in financial markets to meet the lending needs of a business
• Describe the two types of credit risk associated with the credit process
• Discuss the importance of credit analysis
• Explain the relationship between the credit risk of a customer and the interest rate charge on a loan
• Define each of the six sub-processes of the credit process
• Define the credit culture of a bank
• Describe the role of a loan officer
• Outline the different sections of the credit proposal/memorandum (e.g. business & business model review, industry outlook, client profile, sources and uses of cash, projections & financial expectations, qualitative assessments, etc)
• List the tools used to analyse and interpret the results of these various sections
• List the core questions that could be asked by the credit committee
• Define the components of a credit decision
• Discuss the importance of compliance & documentation