Methods for analyzing the quality of a banks loan portfolio

Issue: № 4/1, 2020

Doi: https://doi.org/10.37634/efp.2020.4(1).8

Lending is one of the major banking institutions. But lending has some risks of varying degrees. The main purpose of banks is to repay loans and to maximize profits. To do this, banks need to implement an efficient, flexible and modern credit portfolio quality management system. An important element of this system is the analysis of the quality of the loan portfolio. That is why the consideration of the methods by which banks can carry out this analysis is a very actual topic. The purpose of this paper is to review methods of analyzing the quality of a bank's loan portfolio, as well as to outline the disadvantages and benefits of each method. The paper examines the most common and modern approaches to defining the concept of «bank loan portfolio». The types of loan portfolio are considered. The definition of the quality of the bank loan portfolio is given. The definition of bank credit portfolio management is given and the basic elements of credit portfolio management are given. The main methods to be used in assessing the quality of a bank's loan portfolio are identified. They are divided into three groups: methods of expert judgment, statistical and analytical methods. A more detailed description of the methods in the three groups listed above is given. The rating method, the «Decision Tree» method, coefficient analysis, Monte Carlo method, scoring, correlation-regression analysis, taxonomic analysis and stress testing are characterized. The advantages and disadvantages of each method are also given. Indicators to assess the quality of the bank's loan portfolio are considered: the credit portfolio risk indicators and the profitability of credit operations. After the study, it was concluded that the above methods of analysis of the quality of the loan portfolio should be applied comprehensively. It is determined that currently the banks of Ukraine do not use the whole analytical set of methods, but choose for themselves several and constantly use them in the analysis of the quality of the loan portfolio. In order to ensure effective management of the bank's credit portfolio, it is necessary to constantly monitor the quality of the bank's credit portfolio for early detection of credit risk and its prevention, as well as for detection of deterioration of profitability indicators.

Keywords : bank loan portfolio, quality of bank loan portfolio, credit portfolio management system, methods of credit portfolio quality assessment, credit portfolio quality indicators

References:

1. Brovko L.I., Soroka Yu.V., Brovko Ye.I. Analysis of the credit portfolio of commercial banks of Ukraine in current conditions. Economy and the state. 2018. № 11. pp. 85-89 (in Ukrainian).
2. Zhukova N.K., Zrazhevska N.V. The current state and problems of managing the credit portfolio of commercial banks. Economic Journal-ХХІ. 2013. № 1. pp. 70-72 (in Ukrainian). 
3. Kolodiziev O.M., Khmelenko O.V. Credit management: a textbook for students of specialty 072 «Finance, banking and insurance». Kharkiv: KhNEU after S. Kuznets, 2015. 164 p. (in Ukrainian). 
4. Nechaieva I.A., Kaplan Yu.O. Theoretical bases of credit portfolio quality management. Business Inform. 2011. № 6. pp. 115-118 (in Ukrainian).
5. Manzhos S.B., Klymenko Yu.S. Managing the quality of a bank's loan portfolio in a post-crisis economic development. Economy and region. 2012. № 5(36). pp. 105-109 (in Ukrainian). 
6. Sokyrynska I.H., Zhuravlova T.O. Financial management in the bank: textbook. Dnipropetrovsk: Porohy, 2016. 192 p. (in Ukrainian).
7. Stepanenko K.R. Features of formation of bank loan portfolio. Scientific Bulletin of Uzhgorod National University. 2016. Issue 7. Part 3. pp. 111-114 (in Ukrainian). 
8. Dovhan Zh.M. Bank management: textbook. Ternopil: Economic thought, 2017. 512 p. (in Ukrainian).
9. Banking Encyclopedia / S.H. Arbuzov et.al. Kyiv: National Bank of Ukraine Center for Scientific Research: Znannia, 2011. 504 p. (in Ukrainian).
10. Kalinichenko L., Horbunova T. Theoretical aspects of the formation of banks credit portfolio. Global and national problems of economy. 2015. Issue 6. pp. 695-698 (in Ukrainian).
11. Tavasiev A.M. Banking. Management and technology: textbook. Moscow: YUNITI-DANA, 2005. 671 p. (in Russian).
12. Tysiachna Yu.S. Methodical approaches to assessing the quality of a bank's loan portfolio. Problems of economy. 2014. № 1. pp. 278-283 (in Ukrainian).
13. Zatvornytskyi K.S. Criteria for assessing the quality of a bank's loan portfolio. Financial space. 2018. № 4(32). pp. 99-106 (in Ukrainian).
14. On approval of inspection procedures: Decision of the Board of the National Bank of Ukraine dated 01.11.2016 № 393-rsh. URL: https://ips.ligazakon.net/document/pb16176 (in Ukrainian).
15. Dzholos A.V., Savchenko T.H. Public rating system of Ukrainian banks: purpose and information model. Economy and society. 2017. № 13. pp. 1347-1352 (in Ukrainian).
16. Tarasiuk N.M. Management and Marketing: Practical Work № 3. URL: http://tarasyukn.vk.vntu.edu.ua/file/1/ 19d4cb5553813f0696e76e 233c1b7e19.pdf (in Ukrainian).
17. Monte Carlo method. Wikipedia is a free encyclopedia. URL: https://uk.wikipedia.org/wiki/Метод_Монте-Карло (in Ukrainian).
18. How banking scoring works. Finance.ua – an independent Ukrainian financial portal. URL: https://finance.ua/ua/credits/ kak-rabotaet-bankovskiy-skoring (in Ukrainian). 
19. Shcherbatykh D.V. Modern methods of stress testing of the banking system of Ukraine. Economy and society. 2018. № 19. pp. 1210-1218 (in Ukrainian).
20. Herhel A.Yu. Areas of analysis of bank loan portfolio quality. Development Management. 2014. № 3(166). pp. 92-94 (in Ukrainian)

Download paper