Financial Institutions Must Utilize Portfolio Risk Management Tools
While the U.S. economy has continued to do well since mid-2009, we are now entering the tenth year of growth. We're very far into the current economic cycle. It’s still unknown if the economy will experience slow or stagnant growth in 2019, but it will eventually begin to slow. As we head into a new year, banks and credit unions must have a solid understanding of their existing portfolios and opportunities for profitability. Risk management will be crucial to remaining profitable and continuing growth.
Consumers still want to borrow; therefore, banks and credit unions still need to lend. This is especially important considering the competitive landscape. If traditional financial institutions do not lend, alternative lenders like Kabbage and OnDeck will, creating an even greater need to supercharge growth and profitability while lowering risk and loss. However, financial institutions cannot compromise their underwriting standards for the sake of growth and competitiveness. Growth is possible in a late cycle – it simply requires the right tools.
Late Cycle Growth Requires Technology, Automation & Data
From a technology standpoint, portfolio risk management tools will be critical to help manage credit risk before it becomes problematic. While many institutions have something in place, they typically leverage multiple, disjointed systems for loan origination and portfolio risk management, limiting their ability to truly maximize profitability. This often forces financial institutions to make tough choices as to where to focus their investments and resources. Often times, priority goes to one or the other rather than both.
Financial institutions must also seek out technology that provides continuous, automated portfolio monitoring throughout the entire loan life cycle. It is becoming increasingly vital that banks and credit unions monitor accounts on a daily, weekly, monthly, or quarterly basis with fewer manual processes that adds time and costs. In the tighter credit environment, it will be especially critical for financial institutions to take the best loans off the market prior to the competition. If not, they will take on loan risks that they usually would not. However, with the right technology and automation, banks and credit unions can effectively and efficiently monitor for risk while using significantly less manual intervention that ties up resources and adds costs.
Leveraging powerful data is also critical. Managing risk and enhancing processes can be better achieved through current and accurate bureau data, loan, deposit and collateral data, as well as financial statement data, from internal and external systems. With a true, 360-degree view of their portfolio, banks and credit unions can make more strategic, data-driven decisions, such as identify problem loans before they become delinquent.
Additionally, data not only allows institutions to make better decisions, but it can offer greater insight into the profitability of that borrower. As a result, the institution can potentially provide relevant services to help support that borrower’s growth, thus preventing that borrower from going into delinquency. Also, while spotting trouble accounts, institutions must also monitor for high-performing loans for renewals and cross-selling, as well as to know what types of loans or businesses are thriving. This can provide great, data-backed insight into where financial institutions are most profitable and where they should focus on.
There is an opportunity to grow during a late cycle, but banks and credit unions must examine what strategies and technologies to invest in for greater profitability and lower risk. More important than ever is to know what is making money and what is not. With powerful data and automated portfolio risk management tools, banks and credit unions can better evaluate their portfolios to identify problems early on and make strategic decisions to support long-term growth.
Posted on Friday, February 15, 2019 at 3:15 AM
by Baker Hill