【正文】 d industry ? Background information on the firm’ s operations ? Organizational and business structure ? Products or services provided ? Competitive position in the marketplace ? Business and industry outlook report ? Management character and quality ? The nature of the borrower’ s loan request and the quality of the financial data provided. 22/64 Step 2: Common size and financial ratio analysis ? Common size ratio: ? divide by total assets (balance sheet) or sales (ine statement). ? It is adjusted for size and thus enables parisons across firms in the same industry or line of business. ? The figures can be distorted, if a firm has one balance sheet or ine statement item that differs sharply from industry standards. 23/64 Financial ratio analysis ? Four categories ? Liquidity ratios: indicate its ability to meet its shortterm obligations and continue operations. ? Activity ratios: signal how efficiently a firm uses assets to generate sales. ? Leverage ratios: indicate the mix of the firm’ s financing between debt and equity and potential earnings volatility. ? Profitability ratios: indicate the firm’ s sales and earnings performance (ROE, ROA). 24/64 Step 3: Cash flow analysis ? Cash flow estimates are pared to principal and interest payments and discretionary cash expenditures to assess a firm’ s borrowing capacity and financial strength. ? Cash flows: ? Operating activities ? Investing activities ? Financing activities 25/64 Step 4: Financial projections ? The previous 3 stages: historical performance ? The final step addresses the future conditions. ? In order to understand the range of potential outes, an analyst should make forecasts that incorporate different assumptions about the future. ? Sensitivity analysis:three alternative scenarios ? Best case scenario ? Worst case scenario ? Most likely scenario 26/64 Riskclassification scheme ? After evaluating the borrower’ s risk profile along all dimensions, a loan is placed in a rating category ranked according to the degree of risk. ? Such a system is used for credit granting and pricing decisions. 27/64 Chapter 17 Evaluating Consumer Loans ? Analysis of consumer loans differ from that of mercial loans: ? When evaluating measurable aspects of requests, banks are addressing the same issues. ? Banks have to deal with a large number of distinct borrowers with different personalities and financial characteristics. ? Consumer loans differ so much in design that no prehensive analytical format applies to all loans. ? For most consumer loans, there is no formal analysis of individual borrower characteristics unless a credit scoring model is used. ? Installment loans are treated much like mercial loans. 28/64 Credit analysis (cont’ d) ? Analysis of consumer loans differ from that of mercial loans (cont’ d): ? The quality of financial data is lower: Unaudited ? The primary source of repayment is current ine, which may be highly volatile. ? The effect is that character is more difficult to assess, but extremely important. 29/64 Character ? The most important – yet difficult to asses – is character: the customer’ s desire to repay a loan. ? The only quantitative info available is the borrower’ s application and credit record. ? Banks rely heavily on subjective appraisals. ? Obtain personal references ? Verify employment ? Check the accuracy of the application ? If the officer determines that a potential customer is dishonest, the loan is rejected automatically. 30/64 Capital ? Capital refers to the individual’ s wealth position and is closely related to capacity, an individual’ s financial ability to meet loan payments in addition to normal living expenses and other debt obligations. ? For almost all consumer loans, the individual’ s ine serves as the primary source of repayment. ? Minimum down payment requirements ? Maximum allowable debtservice to ine ratios ? Stability of the ine source 31/64 Collateral ? Secondary source of repayment. ? Collateral may be ? The asset financed by the loan ? Other assets owned by the individual ? The personal guarantee of a consigner on the loan 32/64 Two additional Cs ? Customer relationships and petition. ? A bank’ s prior relationship with a customer reveals info about past credit and deposit experience that is useful in assessing willingness and ability to repay. ? Competi