LoanAnalytics helps lending institutions manage their loan portfolio like an investment portfolio. To accomplish this, we will help your organization through the LoanAnalytics four-step enterprise-wide Quantitative Loan Portfolio Management process.
Step #1: Portfolio Segmentation
The quantitative loan portfolio management process begins by segmenting your loan portfolio into homogeneous sub-portfolios, customers and loans with similar risk characteristics. The loan portfolio should be managed the same as an investment portfolio, with the objective of creating a risk efficient portfolio…maximizing the portfolio risk-adjusted return at a given level of risk.
Step #2: Risk Identification
Step two is the identification and monitoring of your sub-portfolio risk. The foundation of effective loan portfolio management is contained within the probability of default (PD) and loss given default (LGD) rating/grading system. Historical risk migration and projected stress testing analyses are used to identify sub-portfolio volatility, including allowance and capital needs under current and user-defined stress scenarios. Industry correlation coefficients are used to manage portfolio concentrations and to lower economic capital requirements.
Step #3: Cost Allocation
Step three is the identification and allocation of your loan origination costs, fixed overhead and servicing costs, and variable servicing and marketing costs over the total loan portfolio. The costs are allocated by line of business, loan size, probability of default risk, and loss given default risk.
Step #4: Profit Maximization
Step four of the quantitative loan portfolio management process is the maximization of your stockholder value by creating a risk-efficient portfolio – a portfolio that maximizes the expected return for a given level of risk. The goal is to reduce portfolio risk and volatility while maintaining and/or increasing portfolio risk-adjusted returns. Risk-adjusted returns can be a risk-adjusted return on capital (RAROC) or risk-adjusted return on asset (RAROA). Profit maximization includes identifying customers with a low return and/or a high risk and then taking action to increase the return or reduce the risk.
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