Elective overview part one: business lending credit risk assessment

Jun 30, 2020

Financial Services lead lecturers, Noel McArdle and Larry Gordon, and the current FAE Financial Services examiner get together to share insights from the 2018/2019 Financial Services academic examination cycle.

The financial services elective demonstrates how financial institutions work with business borrowers to put borrowing structures in place to meet business needs. It is a dynamic, interesting, and rewarding elective. The unique insight gained will benefit professional accountants when they are tasked with guiding clients who wish to raise new borrowing or restructure an existing borrowing. It will give those candidates who want to seek a career in the business lending divisions of financial institutions the knowledge to challenge for positions by accelerating them up the learning curve.

The 2018/2019 financial services results were successful in its inaugural outing. However, as the examiner posited, and both Noel and Larry agreed, there are always things to improve on. In the first of this series of articles, Noel McArdle provides a useful summary for candidates attempting questions in business lending credit risk assessment, part of the banking segment of the financial services elective.

Examination time is fast approaching in what has been a year of great challenge, change and opportunity. Noel has provided some key tips on how to fully achieve your potential from the elective, outlined below.

  • Make sure to assess the economic, industry and business risks using SWOT and use it to give your views on the implications for the prospects for the SME business from the lenders perspective. Candidates are doing good work on the basic SWOT, but not maximising the mark by going on to give their views on the implications of the SWOT for the business and the lender.
  • In terms of financial analysis, as well as pinpointing what is occurring per the historical figures it is essential to give your views on why you feel the figures are moving in the current direction and to critically assess the assumptions underlying any projected figures provided.
  • On occasion, candidates may be required to perform a sensitivity analysis. It is essential to get both the numbers correct and to give your views on the implications of the sensitivity outcome for the business and the lender.
  • When doing the repayment ability calculations, be careful when judging the cash flow impact of working capital changes. This is an exercise where candidates can improve performance by practising the workings, using previous examination papers to sharpen their skills. Remember, when completed, work the figures by giving your views on the credit risks unearthed by your analysis.
  • The course complements the existing financial strategy skills you have developed. You need to enhance those skills by studying the lending specific theory on debt structuring and financial products.
  • A new area for you in the elective will be the science of credit risk management and security. As it is quite technical, please study it. No major lending can be completed without considering the security implications.

The elective challenges the candidate to appreciate at a strategic high-level the management of risk and credit risk in financial institutions. As a reminder, the key specific competencies in this area are as follows:

  1. Discuss the risk appetite frameworks of banks;
  2. Discuss credit risk appetite statements;
  3. Explain the Basel principles for the management of credit risk;
  4. Identify the components of the credit risk management framework;
  5. Explain the principles of credit portfolio management, stress testing and credit concentration risk;
  6. Demonstrate an understanding of the end-to-end credit process;
  7. Demonstrate an awareness of credit models such as credit grading and credit scoring; and
  8. Pricing for risk.

Finally, we have made many special handouts available to you. The examiner is aware of these additional materials, so it is important that you download/print these and absorb them to deepen your understanding of these competencies. You should then study the past examination papers and practice getting your thoughts down on paper.

Best of luck in August!