Portfolio Risk Management

Credit Management
Portfolio Risk Management: An Evolving
Approach
Credit is an integral part of commerce and the management of credit
risk has evolved from individuals interpreting broad corporate policy, to
sophisticated methodologies that enforce consistent analysis and
decisions.
Augustus Hall Limited (RC. 912580)
www.augustushall.com

Credit Management
Page 2 of 14
www.augustushall.com |Augustus Hall Limited (RC. 912580)
Table of Contents
Course Highlights - A 2Day Course (Course Fee: N190,000).......................................................................................... 4
Portfolio Risk Management: An Evolving Approach .......................................................................................................... 5
Introduction.......................................................................................................................................................................................... 5
Information Architecture for Credit Risk Management ............................................................................................. 7
The Promise of Portfolio Credit Risk Management .......................................................................................................10

Credit Management
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Course Highlights - A 2Day Course (Course Fee: N190,000)
 Introduction to Portfolio Management
 New Product Portfolio Management: Practices and Performance
 Portfolio Management: Making Strategic Choices: Which market, product and technologies will we invest in?
 Resource Allocation: Spending your scare engineering, research and development, and marketing resources.
 Project Selection: Understanding on which new product or development projects you choose from the many
opportunities you face.
 Balancing: Having the right balance between the numbers of project you do and the resources and capabilities
you have available
 Portfolio Management Methods: Gaining insight as to what portfolio methods companies use
 Major problems with portfolio management
 Enterprise Risk Management
 Data Quality and Integrity
 Risks Associated with Lending
 Credit Culture and Risk Profile
 Loan Portfolio Objectives
 Strategic Planning for the Loan Portfolio
 Financial Goals
 Risk Tolerance
 Portfolio Risk and Reward
 The Loan Policy
 Loan Policy Topics
 Loan Approval Process
 Portfolio Management
 Oversight
 Risk Identification
 Exceptions to Policy, Procedures, and Underwriting Guidelines
 Documentation Exceptions
 Policy and Underwriting Exceptions
 Aggregate Exception Tracking and Reporting
 Portfolio Segmentation and Risk Diversification
 Identifying Concentrations of Risk
 Evaluating and Managing Concentrations of Risk
 Concentration Management Techniques
 Stress Testing
 Allowance for Loan and Lease Losses
 Credit Management Information Systems
 Collections and Work-out
 Lending Control Functions
 Independence
 Credit Policy Administration
 Loan Review
 Audit
 Administrative and Documentation Controls
 Communication with Senior Management and the Board
 Loan Portfolio Management Supervision
 Asset Quality Reviews
 Targeted Reviews
 Process Reviews
 Administrative and Documentation Reviews
 Compliance Reviews
 Follow-up Evaluations on Management Commitments
 Ongoing Supervision

Credit Management
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Portfolio Risk Management: An Evolving Approach
Introduction
Credit is an integral part of commerce and the management of credit risk has evolved from
individuals interpreting broad corporate policy, to sophisticated methodologies that enforce
consistent analysis and decisions.
 It is interesting to note the rather striking difference in the sophistication of credit risk
management techniques in different types of corporations - manufacturing, retail, leasing,
insurance and banking.
o For example, the mission critical nature of credit in the financial services sector has
given rise to substantial information technology infrastructure investments
surrounding the credit granting process.
o Whereas, to date, in the manufacturing trade credit arena, many organizations lag
behind in their IT infrastructures that support automated credit processing.

Credit Management
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 Increasingly across all industries management sees rapid advances in technology and the
increasing sophistication of software applications as an opportunity for improving the
management of credit risk. The collective promise of these developments is substantial.
 However, to fully realize their potential, it will be necessary to look at broad approaches
that integrate software and hardware technologies. With the vast capabilities of today’s
technology, credit decision processes are likely to change more rapidly in the future.
 Of course, technology in and of itself, is only the means to the end. With all of the exciting
possibilities that are offered by technology, it is important that the credit department of the
future adopt a long-term-building-block perspective, if technology is to be used effectively.
 Emphasis must be placed on the engineering of credit risk processes using technology as a
tool. To be truly effective the technology framework must be capable of supporting rapid
changes in credit risk management processes.

Credit Management
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Information Architecture for Credit Risk Management
The management of credit risk has three major dimensions –
 The transaction-level credit decision,
 The management of the credit risk portfolio, and
 Value-added services.
The transaction-level credit decision represents the traditional view of credit. The acceptance of a
customer order and subsequent granting of credit, initiates the acceptance of risk by the
organization.
 The objective in managing individual credit transactions is largely to determine the risk-
return tradeoff in granting credit to each customer.
 The risk tolerance or preferences of the organization are driven by a number of factors.
Typically this includes:
o The competitiveness of its markets,
o Its cost of capital and
o The profitability of its products and services.
 As organizations look more closely at ways to compete effectively in the midst of increasing
local or global competitive pressures, credit will receive more scrutiny as an area that can
contribute to market share growth.
o This changing environment necessitates management look at a broader view of risk
preference.
o In response to the portfolio view of risk management, credit is taking on increasing
importance in today’s market.
At any given point in time, the credit manager is really managing a portfolio of credit risk.
The portfolio perspective is quite different from that of the individual credit transaction.
 It allows credit to be viewed from the standpoint of pooled risk.

Credit Management
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o The opportunity to take on a slightly greater risk in an individual transaction
becomes acceptable provided the overall risk pool stays within an acceptable
tolerance level.
o As the need to grow markets in the face of increasing competition continues the
portfolio perspective is likely to grow significantly in importance in the future.
o Thinking of credit risk management as a portfolio issue will represent a major shift
for many in the traditional manufacturing trade credit world.
 Once again, new advancements in technology can be deployed to aid organizations in the
aggregation of similar customer groups, and the benchmarking of those customer groups’
performance against one another.
o In addition, organizations can establish automated warning flags that provide
notification when the credit risk associated with a given portfolio have reached the
threshold of acceptability.

Credit Management
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In some corporations, credit has the opportunity to provide value-added services to customers and
internal groups such as sales and marketing. For example,
 Frequently the corporation has an intermediate distribution channel where the nature of
the business relationship between the distribution channel and the corporation is usually
quite strong.
 In these circumstances, there is a strong flow of information from the channel partners to
the supplier’s credit organization. For the credit organization there is the opportunity to
provide value-added services.
 These services may take the form of on-site credit reviews, which provide insights in areas
within the distributor’s customer base that offer growth opportunity, or which offer help
with identification of customers that may be facing delinquencies.
 In another example, the organization may wish to provide each customer with an
automatically generated benchmarking report which compares their financial history and
current business performance to comparable peers.
o These peers may be reported as anonymous data points to protect competitive
advantages, but at the same time to stimulate proactive improvements within each
customer’s business practices.
A common aspect of each of these three dimensions is that all of them consist of many
processes and sub-processes. An important new perspective and goal of the credit
department may be to design and implement an optimal set of processes for its business and
environment. To be highly effective any process design must also be extremely flexible. To
create such an environment necessitates close integration of process and technology.
Unfortunately, it has not been uncommon for many corporations to become captive to a set
of technologies and to be forced to configure their businesses to fit available technology,
rather than the other way around.
Historically, credit decision processes have been implemented either manually or with the limited
application of interactive decision support tools. While many credit managers, have had the vision
of a process-oriented organization of their responsibilities, limitations of technology and
information availability have hampered the realization of this vision. The alignment of newer,
integrated decision support technology infrastructures - along with the recognized opportunity to
benefit from a portfolio view of credit risks - represents an exciting opportunity for credit
organizations to realign their operations with a fully integrated process approach that is
empowered by technology.

Credit Management
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The Promise of Portfolio Credit Risk Management
As noted previously, a portfolio of credit customers represents a bundle of individual credit
risks. Credit decisions at the customer/transaction level constantly affect this bundle of risk.
As the management of credit risk has
matured with the increased adoption of
consistent scoring methodologies,
portfolio risk management has become
more feasible and relevant.
The concept of portfolio risk management
may encompass the tracking and analysis of a
number of different risk dimensions.
Regardless of the sophistication of the
portfolio analysis techniques, the common
approach is to stop looking at individual
customers one at a time and instead segment
them by some logical grouping that
incorporates common behaviors and risk factors. Within a given portfolio each customer represents
a different level of risk and opportunity. These differences may be based on the risk of non-
payment, slow payments or the possibility of bad debts and the costs associated in the recovery of
such bad debt. However, because these customers have similar risk characteristics the overall
group performance becomes more important than the risk attributes of an individual firm.
In the past, primary concern for the corporate credit managers has been limiting risk and setting
adequate reserves. By setting up a customized credit policy for each portfolio, specific credit
policies can be established that allow an organization to maximize return relative to the risk profile
of the overall portfolio.
Monitoring of the portfolio risk can lead to proactive actions to influence the composition of the
portfolio, the tightening of credit standards and the allocation of appropriate reserves. Through
portfolio analysis the credit department can also help Sales and Marketing understand where the
best opportunities may exist to grow the business. Often Treasury will be positively impacted
because the portfolio approach allows lower loss reserves than were previously necessary when all
credit analysis was transaction based. The essence of portfolio analysis is the ability to view credit
as a risk/reward scenario rather than just as risk avoidance.
A simple measure of portfolio risk can be defined as follows:
Portfolio Risk = sum of [credit limit x risk score] over all customers in the portfolio
Credit Limits can be replaced by the current exposure to provide a current versus probable
assessment of portfolio risk.

Credit Management
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Consistently measuring portfolio risk
over time will allow the credit manager to
manage aggregate risk within an
acceptable range. Credit managers can
determine the level of risk that the
organization is willing to accept and set
credit policy accordingly.
By constantly monitoring aggregate risk,
credit managers can ensure that the reserve
levels are adequate and also influence
portfolio composition/business development
decisions. For example, if the Sales group
targets a 20% growth in a segment of the current customer base, the credit manager can provide
valuable information on how the resulting credit exposure can be achieved with minimal increase
in portfolio risk.
Keep in mind when developing an automated approach to the management of portfolio risk, the
information architecture for portfolio risk management needs to support the following processes:
Flexible definition of a portfolio.
Flexibility in specifying risk measurements.
Representation of portfolio thresholds.
Triggering of ‘red flags’ for credit managers, on an execution basis.
Using different scorecards for different types of customers/requests.
As organizations look to implement portfolio based credit management solutions, they need to
carefully measure their alternative approaches against these criteria.
There is no doubt the competitive climate in which we operate today will continue to intensify.
Factors, such as deregulation, further globalization of markets through e-commerce and reduced
trade barriers, will make it increasingly challenging to expand markets and maintain desired levels
of profitability.
As we have discussed, forward-thinking organizations are starting to tackle the challenges with
portfolio management techniques, as well as sophisticated analysis and process automation tools.
They will undoubtedly continue to look at ways to segment their customer base and devise pricing,
product and distribution strategies that leverage the knowledge that portfolio analysis provides.
Portfolio based risk management techniques will offer the opportunity to expand market share
within acceptable risk tolerance levels. Investment in sophisticated, but flexible and easy to deploy
IT infrastructure will allow organizations to evolve beyond the realm of traditional credit policy
and create significant “value-added” customer relationship management services.

Credit Management
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Course Objectives
After completing this course, learners will be able to:
 Identify and explain key portfolio structuring considerations
 Evaluate loan requests to support short and long-term portfolio management strategy
needs and growth in risk assets
 Use a thorough guide on portfolio examination – (audit function, loan review function and
credit management function)
 Understand portfolio concentration types, its diversification and exceptions control
 …and many more…
Course Content
 For Course content please check on Page 4 above
Target Audience
Portfolio Risk Management is designed for bankers who want to enhance their knowledge of
portfolio structuring options to benefit both the bank and their customers. It is also appropriate for
credit analysts and entry-level bankers who have completed a new hire training program.
It is suitable if you are in the collections profession, either creditor side or collection agency side or
involved in the process of valuing, and this will be a focal point amongst your peers be it entry-level
individuals, experienced ones (who need an update on their knowledge), & professionals in: sales,
marketing, distributions & logistics, purchases & supplies, financial services, mutual funds, housing
societies, thrift & co-operatives, real estates, civil constructions, brokerage, insurance, general trade
credit & commerce (manufacturing), trades & services, credit services, commercial services,
investments, exchanges, derivatives, accounting/accounting firm, consulting/consulting firm, law
firm, rating agencies, multi-lateral financial institutions, micro-finance, internal controls &
compliance, advisory, business development, & many others who want to enhance their analytical
skills. Besides, particular benefit is also attached to those in the credit & collections field, a small
business owner or anyone who is involved in collecting and managing accounts receivable,
revenues etc.
In addition, to the aforesaid “Typical Job Titles of Attendees” include: Account
Directors/Managers, Operations Officer/Operations Directors/Operations Managers, Debt
Collection Agency (DCA) Managers, Directors/Associate Director, Head of Collections/Collections
Manager, Head of Recovery/Recovery Managers, Head of Revenues Service, Head of Credit/Credit
Manager, Head of Debt Recovery/Debt Recovery Manager, Head of Finance, Head of Fraud/Fraud
Manager, Head of Sales/ Sales Director/Sales Manager.

Credit Management
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Course Date/Time/Venue
Date: Wednesday 1st of June – Thursday 2nd of June, 2016 // Time: 9am - 4pm // Venue @ Augustus
Hall Limited (Victoria Island, Lagos, NIGERIA).
For reservations & enquiries contact us via: enquiries@augustushall.com
or Telephone: +234 (0)1-2170730, +234 (0)802-977-2849, +234 (0)702 -534-7079
Delivery Options
This highly interactive 2-day workshop is delivered in a classroom setting by experienced Augustus
Hall instructors.
Our lead trainer for this course is Areh, Augustus Nnamdi, PGDCFM, AICM, AICA, MACP, AIBD,
MIMC, CMC with over 20 years collective industry experience in operational, leadership and
specialist credit consulting roles. For details click on his LINKEDIN Profile:
ng.linkedin.com/in/augustusnnamdiareh
Course Materials
Each set of participant materials includes:
 Complete explanations of concepts, examples, and exercises with answer keys
 Review sections at the end of each module, highlighting key concepts.
 Case studies allowing the learner to practice each new skill throughout the course

Portfolio Risk Management

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