Counterparty Risk Assessment

Client Issue

The client is one of the largest corporate and investment banks in the Russian Federation. Its key areas of activity are corporate lending (including trade financing), documentary business and investment banking.

As a large commercial bank, the customer struggled with the following issues:

  • Assumptions of cash flow models was not tested on real data
  • Changing macroeconomic environment alters clients’ financial indicators
  • Need for customising bank products accounting for risk
  • High labour costs of monitoring clients’ solvency
  • High level of operational errors due to human factor
  • High level of overdue loans
  • Predictions of clients’ indicators are made without prior knowledge of their reactions to shifts in the macroeconomic situation
  • Demand for an advanced analytics solution

The issues became a barrier to reaching the defined goals.

The client requested Deloitte Analytics Institute to provide consultancy in forecasting the values of clients’ financial indicators, which led to the initiation of a project to develop a data-driven client solvency analysis system.

DAI Solution

Deloitte Analytics Institute suggested an approach based on the following methodology:

  1. Determine the key segments and the key clients in the credit portfolio which will be subject to modeling
  2. Deloitte Analytics Institute uses Deloitte expertise to find financial indicators strongly correlated with clients’ solvency and external macro- and microeconomic factors needed to predict the future values of the indicators.
  3. Two sets of indicators and factors are formed: generic and industry-specific
  4. The bank’s analysts review the sets and come up with proposals for changing the composition of the sets. They can also make some factors “mandatory”, meaning that they must be included in the final model
  5. DAI produces statistical models of clients’ financial indicators based on the sets of target and explanatory features, which were determined in the previous steps
  6. The design of the models is based on machine learning and regression analysis algorithms with the use of recurrent neural networks, as well as parametric and non-parametric regressions
  7. Deloitte Analytics Institute provides an additional worldwide search tool for analogous companies which have the similar financial indicators in similar macroeconomic conditions as compared to the bank’s clients. This tool may be used in forecasting clients’ indicators and evaluating the outcomes of management decisions that were previously implemented in analogous companies.
  8. The developed models and tools are transferred to the bank’s analysts in the form of web-based application, which allows them to easily run the models, customise its’ parameters and use advanced visualisation techniques.

Methods

  • Design Thinking
  • Data Science
  • Agile
  • Machine learning
  • Best Practice

Outcomes

  1. Industrial survey describing the state of the industries, companies’ development prospects and industry-specific indicators.
  2. Algorithms of financial indicators forecasting.
  3. Tool for comparing the outcomes of bank’s cash flow models and DAI’s statistical models and determining the factors of its forecasts divergence.
  4. Tool for finding “analogous” companies.
  5. Web-based application allowing for the mentioned above functionality.

How our solution affects the Shareholder Value

Shareholder Value

  1. Revenue Growth
    1. Volume
      1. Acquire New Customers
      2. Retain & Grow Current Customers
      3. Leverage Income Generating Assets
    2. Price Realization
      1. Strengthen Pricing
  2. Operating Margin (after taxes)
    1. Selling General & Administrative (SG&A)
      1. Improve Customer Interaction Efficiency
      2. Improve Corporate/ Shared Service Efficiency
    2. Cost of Goods Sold (COGS)
      1. Improve Development & Production Efficiency
      2. Improve Logistics & Service Provision Efficiency
    3. Income Taxes
      1. Improve Income Tax Efficiency
  3. Asset Efficiency
    1. Property, Plant & Equipment (PP&E)
      1. Improve PP&E Efficiency
    2. Inventory
      1. Improve Inventory Efficiency
    3. Receivables & Payables
      1. Improve Receivalables & Payables Efficiency
  4. Expectations
    1. Company Strenghs
      1. Improve Managerial & Governance Effectiveness
      2. Improve Execution Capabilities
    2. External Factors