Mar 2021 | Credit Decisions | Portfolio Risk

Supporting your business customers

One of the most consistent and important trends to emerge over the last year is the huge variation in impact across industry sectors and regions of the UK according to the concentration of those sectors.

Ultimately it means an uneven path to economic recovery across the UK; recovery that may be further affected by Brexit. So, supporting your commercial customers and identifying both risk and positive signs of recovery or growth will require a granular, regional, and sectoral view of your portfolio, using all the data you have at your disposal.

The anticipated shock to businesses is yet to be seen

The anticipated shock to businesses is yet to be seen, but by using different data sources including analysing stocks, payment performance and bounce-back loan applications, we are starting to see an emergence of the risks coming through. This is in large part due to the government’s various economic support schemes. However, it’s clear that there is a significant number of companies who would have otherwise folded and thus remain at risk.

While 82% of businesses were trading in December, Accommodation and Food Services had the lowest percentage of businesses currently trading, at 56.9%. Followed by Arts, Entertainment and Recreation at 64.5%¹. We identified these and some other notable industries as at risk early on, as well as the regions of the UK with the highest prevalence of businesses in these sectors.

Ultimately what it means is a very different rate of recovery dependent upon the sector and region in which a business operates. Understanding the concentration of at-risk sectors and regions within your portfolios is critical to assessing risk.

Understanding changing risk profiles across your portfolio

Models and assumptions that usually determine pricing and probability of default (PD) are being challenged. Businesses that would have passed onboarding risk policies with flying colours before are now facing extreme turbulence and stress. As our research has shown, this is particularly pertinent to at-risk sectors and certain regions. To adapt to these changes, you’ll need a high-level understanding of how your portfolio has changed. At an account level, the sooner you’re able to identify critical signs of stress in a customer, the greater your chance of taking action to minimise losses. You may want to look at measures you previously felt were too extreme. You may want to proactively approach your customers to discuss adapting repayment plans where they’ve gone beyond terms – or if they’re still within terms, to reduce overdraft and card limits at renewal.

Spot signs of stress in real-time

No two lending portfolios will be impacted in the same way. It will depend on your customers’ ability to adapt and keep trading. A simple sector-based segmentation is unlikely to be accurate or actionable. Our capabilities can help you understand your changing risks in real-time at a macro, full-portfolio level, giving you the best chance of mitigating losses from payment failures while continuing to trade.

Monitor current accounts

CATO (Current Account Turnover) data gives you a view of a business’ cashflow over time, helping you assess its financial health and creditworthiness. It continues to be the most reactive data set we’ve got, with the most recent data being just 15 days old. Banks are already using it to monitor current account activity, and it’s now available to non-bank lenders – although it’s relatively new to market. You can use this alongside CAIS (Credit Account Information Sharing) data – information from our shared database of more than 13 million commercial credit accounts. This shows you a business’ credit commitments and credit account behaviour. By combining the two, you get a full view of monthly changes to credit/debit turnover, average balance, days in excess and rejected payments – all of which are very real indicators of a business’ tangible ability to pay.

Anticipate acute stress

With a month-on-month cash flow analysis, you will be well placed to assess a small business’ sustainability while under stress conditions. Should you see signs of a drop in liquidity, you can take measures to help businesses through it, perhaps by extending an overdraft or granting payment holidays for outstanding loans. You may also be able to help firms restructure their wider short-term expenditure to mitigate against any unnecessary outlays

How Experian can help

We have developed a number of tools to help you understand and leverage insight from the new set of metrics and indicators the pandemic has brought about. These include our:
• Confidence index: Mapping regions and local areas against risk or opportunity indicators.
• Commercial Volatility Index: Built specifically to identify signs of stress from Covid-19 so you can make prompt interventions.
• Tailored unemployment curves: A unique solution to understanding estimated unemployment within your portfolio, combining our market-leading forecasting with CAIS data.
• Furlough ranking tool: A map showing all furloughed employees across the UK. By selecting a sector, entering a percentage or choosing a location you change the map to view more detailed information.

Contact us to find out more.

¹https://www.ons.gov.uk/businessindustryandtrade/business/businessservices/bulletins/businessinsightsandimpactontheukeconomy/17december2020