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Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Expert led content

+1,000 expert presented, on-demand video modules

Learning analytics

Keep track of learning progress with our comprehensive data

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Engage with our video hotspots and knowledge check-ins

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Gain CPD / CPE credits and professional certification

Managed learning

Build, scale and manage your organisation’s learning

Integrations

Connect Finance Unlocked to your current platform

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More featured content

Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Credit Analysis of Banks

Credit Analysis of Banks

Moorad Choudhry

34 years: Banking and Capital Markets

Credit analysis is industry-specific. Moorad discusses the bank-specific financial ratios used to assess a bank's asset quality and benefits for a bank of obtaining a credit rating.

Credit analysis is industry-specific. Moorad discusses the bank-specific financial ratios used to assess a bank's asset quality and benefits for a bank of obtaining a credit rating.

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Credit Analysis of Banks

5 mins 22 secs

Key learning objectives:

  • What bank-specific considerations are made by credit analysts?

  • What financial ratios can be used to assess a bank’s asset quality?

  • What are the reasons for obtaining a credit rating?

Overview:

When analysing a bank, or other financial institutions, credit analysts will have a narrower focus on their customer base, asset quality and their level of loans. Additionally, they will use a variety of measures such as loss reserves and net losses.

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Summary

What will the credit analyst consider when analysing a financial sector company/bank?

  1. Customer base
    • The type of customer base served by the company. For example, how much of a bank’s lending is to the wholesale sector, how much is retail etc
  2. Asset quality of the institution
    • For example, the event of diversification of a bank’s lending book. Diversification can be across customer base as well as geographically
  3. The level of loans compared with levels in peer companies and the risk involved with this type of lending
    • For example, the expected frequency of bad loans from direct unsecured retail customer loans is higher than for retail customer loans secured by a second mortgage on a property

What financial ratios can be used to assess a bank’s asset quality?

  • Loss reserves / net charge-off level
  • Net losses / average level of receivables
  • Non-performing loans / average level of receivables

What are some other important measures for financial companies?

  1. The leverage ratio
    • For financial sector companies in particular, the industry and business itself are highly leveraged. Banks are therefore permitted a significantly higher leverage level than other companies
  2. Liquidity
    • Due to the nature of the industry and the capital structure of banks, the lack of liquidity is the primary reason behind banking failures

Why do some firms struggle to raise liquidity?

  1. Internal Factors - Deterioration in earnings or a very poorly performing loan book, connected perhaps with a downgrade in credit rating
  2. External Factors - Major structural faults in the money markets

What are the main sources of liquidity?

  • Cash
  • Cash equivalents
  • Level of receivables under one year / level of short-term liabilities

What are some other measures of financial strength?

  • Asset coverage
  • Earnings per share
  • Size of the institution

What are the reasons for obtaining a credit rating?

  1. Provides independent verification of the financial strength of the bank
  2. Provides access to wholesale markets for the issuance of:
    • Additional Tier 1 and Tier 2 capital
    • Covered bonds
    • Senior unsecured bonds
    • Short-term funding such as commercial paper and certificates of deposit
  3. Focuses strategy development: management needs a strong business plan to present to the rating agencies

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Moorad Choudhry

Moorad Choudhry

Professor Moorad Choudhry is a non-executive director at two UK financial institutions, having worked in London since 1989. He has experience in wholesale capital markets, treasury, ALM, and balance sheet management. Moorad's most recent role was as divisional treasurer at the Royal Bank of Scotland. He has also worked with Europe Arab Bank, KBC Financial Products, and JP Morgan. He is the author of "The Principles of Banking," which is currently in its 2nd edition.

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