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A Decision Model Proposal for Credit Risk Rating of Companies
Gökhan GENCER
Introduction
Loans are a key element in economy
Loans are risky
Analyzing risk is essential
To analyze the risk a method is required
Methods are controversial
Scope
Non-bank & Non-financial firms
Small to Medium Enterprises & Corporate Enterprises
Probability of Default as defined on BASEL II Accord
Probability of default
Exposure at default
Loss given default
Importance weight of each criterion
Original Criteria Derived From the Literature
Return on Assets
Return on Equity
Net Profit Margin
Deadline of Receivable
Deadline of Payables
Assets Turnover
Acid Liquidity
Market Share
Firm Size
Cash Liquidity
Current Liabilities to Working Capital
Solvency Ratio
Leverage Ratio
Financial Expenses Coverage
Efficiency
Cash Conversion Cycle
Original Criteria Derived From the Literature
Macro-Strategic Capability
Decision Making Ability
Organizational Capability
Level of Standardization
Corporate Brand Recognition
Coordination Capacity
Relationship with Government
Relationship with Financial Sector
Tangible Collateral
Growth Opportunities
Experts
Experts’ advised the following to be added:
Buyer/Seller Concentration
Quality of Other Creditors
Gearing Ratio
Liabilities to Sales Ratio
Current Ratio
Competitive Analysis
Foreign Currency Risk
Market Diversification
Age of the Company
Track Record
Successor Risk
Sector’s Properties
Sector Diversification
Sector’s Position and Direction
Decision Makers’ Advices About Criteria
The Decision Makers’ advised following to be removed:
Assets Turnover
Growth Opportunities
Solvency Ratio
Decision makers advised to add
Quality of auditing
Priority in the business group
as a factor of Corporate Governance.
Decision Makers’ Advices About Criteria
The Decision Makers’ advised to divide
Relationship with Government
into
Reputational Risk and Morality
Country Based Risk
Decision makers advised to change
Relationship with Financial Sector as
Quality of Other Creditors
Cash Conversion Cycle as
Stock Cycling Rate
Hierarchic Model
Survey
Pairwise Comparison Judgements
Decision MakersZiraat Daruma Akbank Garanti HSBC IFC UBS Finansbank
Comparisons Ahmet Keskin Selçuk Keremoğlu Derya Ergören Serkan Pak İrem İnce Emre Saracoğlu Yeşim Sümerkan Oğuzhan Dumanlı Average
Current State
1 0.14 0.17 0.14 0.20 0.20 0.14 0.13 0.33 0.172 4.00 4.00 7.00 5.00 4.00 5.00 0.13 1.00 2.473 7.00 0.50 5.00 6.00 4.00 5.00 8.00 3.00 3.874 0.20 0.50 7.00 0.17 3.00 0.20 0.14 0.20 0.465 0.33 1.00 9.00 1.00 3.00 7.00 1.00 5.00 2.05
Firm's Propertie
s
6 5.00 0.33 0.14 0.20 0.20 1.00 1.00 0.14 0.447 0.50 6.00 0.11 0.20 5.00 1.00 1.00 1.00 0.878 1.00 0.33 0.14 6.00 0.14 1.00 0.14 0.33 0.469 3.00 8.00 0.11 0.13 0.14 1.00 6.00 0.33 0.75
10 0.33 2.00 9.00 7.00 7.00 1.00 1.00 0.33 1.7711 2.00 0.33 0.11 8.00 0.20 1.00 0.13 0.33 0.5112 0.25 2.00 8.00 0.13 5.00 1.00 7.00 3.00 1.64
Exterior Conditio
ns
13 0.33 3.00 0.14 0.14 3.00 5.00 7.00 7.00 1.4014 4.00 1.00 8.00 7.00 3.00 0.33 8.00 0.20 2.0915 5.00 0.33 9.00 7.00 0.20 0.20 0.14 0.20 0.7716 0.50 2.00 0.14 8.00 5.00 1.00 0.14 1.00 0.97
Profitability
17 3.00 5.00 0.13 6.00 5.00 1.00 0.13 3.00 1.4618 0.33 2.00 8.00 7.00 6.00 1.00 8.00 3.00 2.9319 0.33 1.00 0.14 5.00 0.20 1.00 0.13 0.33 0.4620 3.00 3.00 9.00 0.14 0.33 1.00 0.14 3.00 1.0621 0.33 2.00 0.13 7.00 5.00 1.00 7.00 0.33 1.27
Cycles22 1.00 3.00 8.00 3.00 1.00 1.00 0.13 0.20 1.0823 1.00 0.50 8.00 3.00 1.00 1.00 0.13 1.00 1.0524 0.33 2.00 0.13 0.33 1.00 1.00 8.00 5.00 1.01
Financial Structure
25 3.00 3.00 0.13 1.00 0.14 0.33 1.00 0.33 0.6026 3.00 5.00 8.00 0.33 0.14 1.00 4.00 3.00 1.7027 4.00 5.00 0.14 5.00 0.33 5.00 0.14 5.00 1.4328 0.25 1.00 0.13 0.20 0.33 1.00 1.00 0.20 0.3829 3.00 0.20 0.14 0.20 3.00 0.33 0.20 1.00 0.4930 4.00 3.00 6.00 6.00 7.00 1.00 0.14 3.00 2.45
Credit Risk
Analysis
31 1.00 0.14 8.00 1.00 0.20 0.14 0.14 0.33 0.4532 1.00 0.50 6.00 0.14 3.00 5.00 0.14 1.00 0.9933 5.00 8.00 8.00 5.00 5.00 1.00 8.00 5.00 4.8834 0.17 0.33 0.14 0.17 0.33 1.00 1.00 0.33 0.3335 6.00 7.00 8.00 5.00 3.00 3.00 8.00 5.00 5.2836 4.00 0.50 0.14 1.00 3.00 1.00 0.17 0.33 0.68
Priorities of CriteriaResults in the order of criteria Results in the order of importance
A1 Market Share 5.9% D3 Net Profit Margin 10.6%A2 Quality of Other Creditors 0.9% F4 Leverage Ratio 10.4%
A3 Market Diversification 2.1% A4 Buyer/Seller Concentration 7.4%A4 Buyer/Seller Concentration 7.4% F3 Cash Liquidity 6.8%
A5 Sector Diversification 3.1% A1 Market Share 5.9%B1 Firm Size 1.8% F1 Current Ratio 5.8%
B2 Age of the Company 1.0% D2 ROE 4.4%B3 Corporate Governance 1.1% F5 Gearing Ratio 4.2%
B4 Succeser Risk 0.6% D4 Efficiency 4.0%B5 Reputational Risk and Morality 0.6% F2 Acid Liquidity 3.8%
B6 Track Record 1.3% D1 ROA 3.7%B7 Tangible Collateral 0.9% D5 Financial Expenses Coverage 3.5%
C1 Country Based 1.2% A5 Sector Diversification 3.1%C2 Competitive Analysis 1.3% E3 Deadline of Payables 2.5%
C3 Sector's Position and Direction 2.3% E2 Dadline of Receivables 2.5%C4 Foreign Currency Risk 1.5% E1 Stock Cycling Rate 2.4%
D1 ROA 3.7% C3 Sector's Position and Direction 2.3%D2 ROE 4.4% F6 Liabilities to Sales Ratio 2.2%
D3 Net Profit Margin 10.6% A3 Market Diversification 2.1%D4 Efficiency 4.0% B1 Firm Size 1.8%
D5 Financial Expenses Coverage 3.5% C4 Foreign Currency Risk 1.5%E1 Stock Cycling Rate 2.4% C2 Competitive Analysis 1.3%
E2 Dadline of Receivables 2.5% B6 Track Record 1.3%E3 Deadline of Payables 2.5% C1 Country Based 1.2%
F1 Current Ratio 5.8% B3 Corporate Governance 1.1%F2 Acid Liquidity 3.8% B2 Age of the Company 1.0%F3 Cash Liquidity 6.8% A2 Quality of Other Creditors 0.9%F4 Leverage Ratio 10.4% B7 Tangible Collateral 0.9%F5 Gearing Ratio 4.2% B4 Succeser Risk 0.6%
F6 Liabilities to Sales Ratio 2.2% B5 Reputational Risk and Morality 0.6%
Suggestions
This model can be used in a greater project that contains:
Exposure at Default
Loss Given Default
The results of this model can be used by companies,especially by SMEs.
These results can be used in a credit risk rating process for both the rating organizations and the banks.
The resulting values are a crucial input for the potential academic research