Category: Credit Rating Methodologies

Unfortunately the analysis of only the company data is not sufficient!!

One of the most important elements when you work as a Credit Manager in the analysis of credit risk is to better understand how the evaluation of companies you can compare from one Country to another or from one commercial sector to another.

In fact, every day the Credit Manager is in front to analysis of the credit risk of several companies positioned in the most different countries and what he wants to achieve is a risk assessment that is comparable between them.

Unfortunately, today this is very difficult to obtain; In fact most of the time what the market offers is an assessment of the credit risk lowered into the reality of where the company operates.

The Credit Manager is consequently in this situation:

Company A, Country XX, Commercial Sector YY. Evaluation of credit risk: B. Exposure 100
Company B, Country ZZ, Commercial Sector QQ, Evaluation of credit risk: 2. Credit Limit 200.

And here, unfortunately, the problems begin: how can I compare B with 2? Who is more or less risky? And the definition of Credit Limit or exposure is the same? Obviously the problems are many!

It is obvious that for those of us who does the job of assessing the credit risk and the commercial credit is a priority to provide a service that is absolutely comparable between Countries and Sectors: only in this way we will actually help the daily work of our customers (Credit Manager).

From the point of view of the development of the model, the problem is not simple: we must in fact be able to understand better the dynamics of the various economic sectors and lower the valuation of individual companies in the various dynamics.

Here is a simple example.

Company A, ROE = 10%
Company B, ROE = 25%

Company B is better than A? It Depends!

In fact, everything is decided by how goes the sector (or the Country) in which the company operates.

In fact, if we now:

Sector Company A, the median ROE = 5%
Sector Company B, the median ROE = 30%

I guess things change! Company A exceeds the industry in which it operates while the company B no!

So you understand one thing: it is crucial for the Credit Manager who works internationally to know not only the assessment of the credit risk of the company in question, but also the whole sector and the Country in which it operates.

And to have a model for evaluating the credit risk which has to be internationally consistent, we must study and implement the model by carefully observing all these dynamics.

Unfortunately the analysis of only the company data is not sufficient!!

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