Loan Portfolio
Analysis
Agribusiness Finance
LESE 306 Fall 2009
What is it?
Focus is on the lender’s existing loan
portfolio.
Looking for areas of strengths and
weaknesses.
Data mining at segment level (primary
enterprise) to calculate benchmarks.
Sort all loans with credit standards falling
below benchmark performance.
Stress testing portfolio in pro forma context.
Portfolio Segment Analysis
Externalities Affecting
Portfolio Performance….
 Macroeconomic policy
 Farm program policy
 Trade policy
 Weather and disease
 Ability to pay in client nations
 Competitor nation actions
Macroeconomic Conditions
Expensive imports (bad for Ag!)
Gains in productivity (great for Ag!)
Rising crude oil prices (bad for Ag!)
Rising inflation (bad for Ag!)
Low interest rates (great for Ag!)
Rising unemployment (bad for Ag!)
Weak stock market (bad for Ag!)
Federal budget deficits (bad for Ag!)
Can You Assess the Impact
of the Following Events…
1. What if the country’s central bank
adopts a tighter monetary policy?
2. What if we see a 20 percent increase
in crude oil prices?
3. What if exchange rates with client
nations rise?
4. What if effective income tax rates
increase?
Impact of these events on..
Farm commodity prices
Farm input prices
Interest rates
Net farm income
Land prices and other asset values
Off-farm income
Debt repayment capacity
What is Stress Testing?
Ad Hoc stress testing
What is it?
Strengths and weaknesses
Systematic event stress testing
What is it?
Strengths and weaknesses
Ad Hoc Stress Testing
Assume future revenue based
upon past prices, costs and
yields changes by a certain
percent.
Assume percent cut in income,
land values, etc.
One year focus.
Easy to do.
Event Stress Testing?
Pro forma analysis.
Impact of future events:
 Farm policy
 Macroeconomic policy
 Events in client
nations
 Competitor nation
actions
Looking down the road.
What are the differences?
Ad Hoc Stress
Ad
Hoc Stress Testing
Testing
 Assume a change
commodity prices
 Assume a change
in input prices
 Assume a change
in land values
 Assume a change
in wages and
salaries
What are the differences?
Ad Hoc Stress
Ad
Hoc Stress Testing
Testing
 Assume a change
commodity prices
 Assume a change
in input prices
 Assume a change
in land values
 Assume a change
in wages and
salaries
Event
StressTesting
Testing
Event
Stress
 Use projections from
econometric models
that have significant
probability of
actually occurring
 Can address “What
if” questions
associated with
potential events
Why Event Stress Testing?
Tied to specific events that have a
reasonable likelihood of occurring.
Management can respond to likely events
rather than hypotheticals!!!
Consistent accounting of impact on all
economic variables.
Looking beyond the current year when
assessing term debt repayment capacity.
What to Watch For...
Nature of global economic
conditions and what this means:
 Agricultural export demand
 Cost of imports
Central bank reactions to any
buildup in inflationary expectations.
Rising input costs as suppliers pass
on their costs to producers.
A Portfolio
Analysis Model
Portfolio Modeling
Assess portfolio’s performance at the
segment level using mining techniques.
Identify problem loans within that
segment.
Develop benchmarks for use in evaluating
new loan requests and performance of
existing borrowers against the benchmark.
Segment Design...
Less than $250K
Size
Loan Classification
SE Texas
Location
Primary Commodity
Acceptable
Wheat
This Segment Represents....
Less than $250K
Acceptable
=
SE Texas
Wheat
Loan
volume
$6,558K
Building segments representing specific groups
of accounts in the agricultural loan portfolio
Choice of crop yield shocks
Setting loan quality indicators for liquidity,
solvency and debt repayment capacity
Designing and running of new scenario
Bringing up the results screen to view
results of scenario
Design of Multiple
Criteria Segment
Maximum Ratio of Carryover
Debt-to-Equity: set by user
Cutoffs for
Indicators of
Liquidity,
Solvency
and Debt
Repayment
Capacity
Searching for those
loans that do not meet
these standards…
Loan quality
indicators settings
An account falling below
lender set indicator levels
Note existence of short run stress but long run recovery. Decision to stay with
Borrower or call in the loan now? Portfolio manager helps make decision.
Classification
FarmLoan/Borrower
Credit System Loan
Classification
Acceptable
Special
Mention
Substandard
Doubtful
Loss
OR
The goal of the portfolio manager
and credit officers is to make
loans that grade out as “acceptable”, or exceed credit
C
standards. All other classes require additional
attention by the
a
Accrual
Other non
credit officer making
the loan to determine
reasons
foraccrual
weak
s
performance and assess prospects forh improvement.
Cash basis
non accrual loans
Other property owned
to right of arrow....
Loan Class Rating
A. Acceptable loans:
1. Borrowers of the highest quality – national and multinational
companies with diverse business assets and sources of
income: virtually no lending risk.
2. Borrowers of superior quality – same as A.1; little
foreseeable risk.
3. Borrowers of exceptional quality – Largely national
companies with varied business assets and sources of income:
very limited lending risk.
4. Borrowers of excellent quality – Leverage vary low relative
to industry standards. Very strong liquidity with quality
earnings. Strong debt capacity.
5. Borrowers of strong quality – Leverage low relative to
industry standards with strong liquidity. Operations consistently
profitable in recent years with excess cash flows.
Loan Class Rating
A.
Acceptable loans:
6.
7.
8.
9.
Borrowers of good quality – Leverage favorable to peers in
the industry and typically good liquidity. Financial indicators at
or above average to peers.
Borrowers of average quality – average leverage, adequate
earnings, cash flow and debt service.
Borrowers of adequate quality – slightly higher leverage with
adequate but inconsistent earnings, cash flow and debt
service. Trends erratic.
Borrowers of minimally acceptable quality – more
leveraged than peers in industry; adequate but inconsistent
debt service; operations typically profitable but losses may
occur due to difficult economic environment; vulnerable to
adverse industry conditions. Able to refinance debt with other
financial institutions.
Loan Class Rating
B.
C.
OAEM (Special mention) – assets currently protected
but potentially weak; constitute an undue and
unwarranted credit risk.
Substandard loans:
1.
2.
D.
E.
Viable substandard – have well defined weaknesses that
jeopardize liquidation of debts; not performing as agreed but
currently adequately collateralized; collateral marginally
supports credit but collateral values declining.
Nonviable substandard – probable that ultimate payment in
full accomplished only through liquidation, forced or otherwise;
usually treated as non-accrual loans.
Doubtful loans – weaknesses make collection in full
highly questionable and improbable given conditions.
Loss loans – not considered collectable and of such
little value that continuance as asset not warranted.
Migration of Loans
 Portfolios are examined periodically to monitor
outstanding loans falling into lower loan
classifications.
 This can be done in a stress testing context by
examining the effects of lower net incomes and
land values on benchmark loans in each
category for specific pools or loan segments.
 This helps the portfolio manager to stay on top
of changing economic conditions in each of
these segments.