COVID-19 is presenting various pressures on financial institutions in 2020. The economic impact is unprecedented with borrowers–both consumer and business–struggling to make loan payments and survive during these uncertain times. How an FI responds with its credit underwriting and managing borrower loans and relationships will have a significant impact on credit quality and profitability for 2020-2021.
“Many borrowers may have good plans in place but are experiencing temporary cash flow challenges caused by the pandemic,” said Ty Glenham, Senior Lending Consultant of Profit Resources, Inc. “It’s important to avoid a knee-jerk reaction that will hurt the FI in the long run. Instead, analyze liquidity and any credit structural weakness. Look for ways to provide relief and ‘bridge the gap’ with an additional deferment, interest-only period or some other restructure that could put the borrower back on the right path.”
Questions to ask when reviewing credit relationships include:
- Has the borrower utilized any government relief (stimulus checks, PPP, EIDL etc.)?
- What impact has the pandemic had on the borrower and what adjustments are being made?
- Has the borrower projected scenarios addressing “loss of income” and “necessary expenses” for 2020 and first 6 months of 2021?
- Does the borrower have a loan deferment and for how long?
- What is the borrower’s plan or request for assistance?
From a credit perspective, first look at the global impact to the bank’s loan portfolio:
- What segments (consumer, HELOC, Mortgage, Small Business, Commercial, CRE) are seeing impacts, such as delinquencies, negative trends, under-collateralization, failure to meet loan covenants, delays in getting up-to-date financials or business plans, etc.?
- Identify any credit concerns and establish closer monitoring and trend analysis in these loan segments.
- More closely monitor industries and business that are experiencing significant impacts, such as hotels, travel, retail and restaurants.
- Review each borrower and loan on a “case-by-case” basis to determine the best course of action. Establish realistic expectations and action plans.
- Do not delay or procrastinate. Encourage lenders to be proactive and collaborate with credit team.
- Establish lender-credit teams to help in this review.
- Don’t be too quick to downgrade a loan/relationship to a “substandard credit level.” Move to a “watch level” first and monitor more closely throughout 2020 and quarterly in 2021.
Other considerations may include reviewing pricing at restructure, considering additional fees that can be added to loan, researching hedging solutions to improve loan yield, improving data and portfolio analytics, enhancing the loan review process and reviving the special asset committee for better oversight.
Make sure you take care of your best borrowers and relationships during this difficult time,” Glenham said. “These are the foundation for your good credit asset quality.”
Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.