Utilizing Technology to Capitalize on Rising Commercial Growth
Commercial Credit, Small Business Credit, Digital Lending, Enterprise Risk Management, Credit Risk Modeling
The U.S. is undoubtedly experiencing economic growth – with the GDP rising 3% over two of the last three quarters. And with reduced taxes and more solidified economic policies, business activity and investments are ramping up. In fact, Main Street America has seen a steady “liftoff” with investments for the past 5-6 months. However, although overall private business outlook is positive, I strongly urge organizations to evaluate the correlation between growth and increased risks; they go hand-in-hand.
As our economy is quickly activated with increasing interest rates, we are also exposed to the following conditions that point to high credit risk:
Businesses taking more risk
An acceleration in more frequent loan delinquencies
Rising credit risk in several key industry sectors
Rising rates of loss given default
Opportunity for Banks
We recently published an article to the RMA Journal, Preparing for Main Street Liftoff. In this report, we take a look at Main Street America’s positioning in the growing economy, as well as contributing factors to how these private businesses can drive GDP growth over the next few quarters. But what I’d really like to highlight are significant opportunities that banks can capitalize on when it comes to lending to these ready-to-invest businesses.
Did you know that commercial and industrial (C&I) lending is the second highest risk-adjusted return-on-equity business, and remains one of the most attractive business opportunities for banks?
Evaluating and focusing on the industries with the most profitable, less-risky lending is key. In order to do this, there are four strategies that you need to investigate:
Identify industries with uncaptured loan originations: To avoid industry concentration in loan originations, look for industries that are seeing high loan growth with relatively low concentration.
Pursue strong loan performances: Once you’ve found industries with high-growth and low-portfolio concentration, compare these to industries that demonstrate encouraging default loan trends.
Improve geographic targeting: When looking at data, think locally. In several Metropolitan Statistical Areas, Bank’s C&I loan growth has not reflected local economic conditions, suggesting that geographic targeting could be improved.
Focus on counties with opportunities and warning signals: As you review geographic distribution (share and # of establishments), take advantage of counties where underutilized industries have a strong presence, and steer away from over-concentrated industries that compromise a large share.
How Technology Can Help
In order to fully capitalize on C&I lending opportunities and strategies outlined above, banks need to proactively adjust their technology and credit processes that will help achieve growth opportunities and automated efficiencies – resulting in profitable business outcomes.
Look for technologies that can help make fast and effective decisions, without compromising your understanding of risk.
Key capabilities should include:
- Ability to compare national, state and county credit information, loan activity, loan performance, and loan default forecasts, as well as industry sector performance.
- Meet FASB Current Expected Credit Loss (CECL) requirements by deriving probability of default, exposure at default, and loss given default values each year of a transaction by borrower to calculate your expected loss.
- Have a forward-thinking approach by utilizing a combination of macroeconomic data and access to a proprietary database of term debt contract.
- Fast and effective decision-making capabilities rendering a single, comprehensive score for small and mid-sized loans by combining a wide-range of data sources and information.
- By serving Main Street America and applying operational efficiencies with streamlined technologies across your organization, your bank will experience high risk-adjusted return on equity, credit losses within acceptable risk appetites, and lower cost of underwriting and credit review. In addition, it will allow you to proactively manage staff resources to better fit your customer needs - ultimately differentiating your brand in the marketplace.