With crashing consumer confidence, enforced business closures and life as we know it changed, the coronavirus pandemic is creating huge shifts in underlying borrowing characteristics and, inevitably, impacting credit portfolio dynamics. So how can you take control, steady the ship and look after your customers – as well as your future?
Whatever sector you’re lending in, uncertainty is swirling. Home sales are stalling, the car market is in poor shape, the high-street is empty and insurance providers are riding a rollercoaster, as travel claims soar but theft and motor claims take an unprecedented tumble.
While the pandemic is hitting some regions harder than others, wherever you operate, one thing looks clear – consumer incomes are changing, quickly and dramatically. Those changes have the potential to upturn lives, change priorities and rock loan portfolios.
Understand what you’re up against
Here at Experian, our economists believe these evolving consumer circumstances will impact credit providers’ performance across a multitude of dimensions, including account-related fees, changes to interest revenue, credit losses and higher expenses.
How hard you’re hit will, of course, depend on your sector specialisms, your customer base, and how the pandemic ultimately unfolds, but getting ahead of the problem means understanding how things are changing, in as close to real time as possible. And it has to start now.
Take a closer look at your KPIs
Start by using the data you routinely gather to tell you more about what’s happening – and help shape a strategy that takes you forward. Your KPIs can reveal more than you might realise, if you analyse them with specific new questions in mind.
For example, if your most vulnerable customers begin to run into trouble then it could signal that other customers are not far behind, so identify them based on economic impact, then monitor their data for signs of stress. This data layer will also enable you to iteratively build a fuller view of the economic landscape both during, and in the aftermath of, the coronavirus pandemic.
Run rapid, relevant scenario modelling
Scenario modelling is part of any credit provider’s toolkit, but scenarios led purely by macro-economics or traditional credit drivers many no longer enable you to plot a successful path forward. Quite simply, they were built before today’s challenges were even imagined.
So, it’s time to develop, test and integrate new scenarios, combining macro-economics with the potential progression of the pandemic, the UK’s regulatory response, shifting supply and demand, and regional differences in both impact and response. If that feels like a strain on already depleted resources, specialist help is out there, including from our own economics experts.
Stretch your stress testing to new limits
The sheer scale of the pandemic has moved lenders into uncharted waters, and you’ll now need to rapidly calibrate the outer limits of possible actions with new data. The same goes for IFRS 9 models designed to predict expected credit losses. Firstly, these need to have reasonable and appropriate economic scenarios to reflect the most up to date economic views. Then effectively re-engineered, these tools can help you mitigate risk, identify valuable avenues for growth and better protect your credit portfolio. Left in their pre-pandemic form, they’ll tell you entirely the wrong story.
Scenario modelling isn’t the only tool you’ll need to sharpen to tackle this current crisis. Your stress-testing strategy is also going to need a comprehensive overhaul if it’s to remain useful.
In recent years, stress testing has become a vital way for lenders to assess the vulnerabilities of consumer and commercial lending portfolios. However, whether they’ve been built by your own teams or independent regulatory bodies, your current stress tests will, once again, be based on scenarios from the pre-COVID world.
Bring in the very best insights, expertise and support
From scenario modelling and stress testing to up-to-date IFRS 9 models, the tools exist to unlock trends, shape strategies and start safeguarding everything you’ve built. But with your teams stretched and scattered, we understand that such intensive projects can feel out of reach.
That’s why, here at Experian, our experts are working with leading lenders to fight against current uncertainty and pave a way forward. However you’re being impacted, we can develop appropriate, effective, highly granular models that consider the different variables in play and give you a clearer forecast of what the future looks like – and what your next steps should be.
We can help you recalibrate tools such as IFRS 9 based on the latest insights, making sure they’re both reliable and robust. In fact, our world-renowned economists are already realigning and updating our own unique, transparent software to give you the agility and accuracy you need.
They’re ready to create bespoke models that assess your customers’ probability of default, your organisation’s exposure and your likely losses in the face of today’s unprecedented challenges. It’s exactly what you need to adapt your provisioning, steady your portfolio, reclaim your certainty and carve a clear path towards a stronger future.
Find out more about Experian’s analysis of the COVID-19 crisis, its impacts on consumers and lenders, and how we can help your business through it, in our white paper ‘How to effectively manage consumer credit risk in a turbulent economy’.