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Market scoping and client onboarding in banks
MAMUN RASHID
Banks and banking seniors across the global or regional banking arena are being faced with one very important issue -- which market(s) to enter, which product to offer and which clients to choose and onboard. One can put it under strategic review or more so as target market risk acceptance criteria or for a country like Bangladesh, client underwriting policy or core risk management guideline. In today’s world, most of the large banking clients are in fact solicited ones.
Which sectors are attractive as of today or may be termed as growth sectors, what are the underlying sectoral risks of entering those sectors and what kind of facilities should we be considering for them remains a pivot in the minds of senior bankers or risk professionals.
So goes for identifying the sectors of the future while delineating a sustainable financing or underwriting strategy for a bank. Because we all know, in today’s dynamic world and shifting economic architecture today’s winners can be tomorrow’s losers in the midst of a fiercely competitive market scenario.
We in banks usually align capital risk taking with economic drivers as per GDP (gross domestic product) profile and BOP (balance of payment) for external sector consideration. For instance, in a dollar starved country, export-oriented industries is an important sector to be aligned with as it also gets government and regulatory support. Industry that are core to the economy and likely to sustain economic shocks are usually picked up. Ideally, industries that also hedge each other during downturn and upturn should be considered.
One may think of taking the top 10 of each industry segment. For high performing industries, one may take even more than 10, may be 15, thereby having a bit of portfolio concentration towards more successful economic sectors or industry players. A well-knitted client onboarding policy-industry-specific strategy may be considered. Further categorisation can be done based on local, multinational or JV-type entities.
Certain sectors are more sensitive, for instance airlines, hospitality, education and healthcare. Since these can attract social and environmental risks, only specialists’ groups should handle these credits.
We should always identify potential long-term survivors and also do a key management capability assessment of theirs. Here, history has proven proper succession planning also plays a critical role. In case of family businesses, generational leadership development is taken into account. Possible competition from other similar or competing countries should be taken into cognizance along with the tariff structure if an obligor is driving an import-based business.
RISK ACCEPTANCE CRITERIA
A minimum top line/sales revenue threshold (earnings before interest, taxes, depreciation and amortisation or “EBITDA”) should be used as a benchmark while considering client selection. The EBITDA margin is important as a key criterion of a potential borrower’s ability to repay debt and other obligations. Overall liquidity position of the business plays an important position here. However, the EBITDA margin requirement can vary based on industry profile. Risky industries will have higher EBITDA ask.
Similarly, the debt to EBITDA ratio determines the borrower’s ability to repay its short-term and long-term payment obligations.
For industries that enjoy the benefit of concessions/licenses (such as the telecom and energy sectors), strength, legal enforceability and performance issues are taken into account. A legal opinion may also be sought. For example, a solicited power plan will always have lower risk of repayment than an unsolicited one.
The FCF (free cash flow) analysis is critical for evaluating a borrower’s dividend planning considering the lender’s own cash generation and external borrowing.
In todays’ banking world, we try to protect our downside through security and collateral consideration, but key repayment guarantee comes from internal cash generation of the business or surplus cash being generated. How relevant is the business to the future of the economy or what is their long-term survival strategy or how do they withstand the evolving competition would play a big role here. We in banks literally finance the future only -- future viability of the business, industry, owners or even the economy.
The author is chairman of Financial Excellence Ltd