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I was asked a question today that I thought would be interesting for the general readership – to see what approaches were being used. To quote the question:
My … question for you is regarding retail pooling……as you know, when we implemented in <deleted>, each exposure was individually assessed and the pooling approach was not adopted.
Given that SMEs have the ability to fluctuate between Corporate and Retail classifications, how does that work from a model perspective for banks that have adopted the pooling approach for retail? For example, a business is assessed using a non-retail application scorecard as it meets corporate criteria and a PD is calculated. If that business then ceases to meet the corporate criteria would it then need to be allocated to a Retail pool? Then what happens if it pops back into the Corporate bucket?
I can only assume that this is not dynamic managed and that there would need to be some manual reclassication / reassessment of the exposure.
I know what my response would be, but I would be interested to see what approaches are being adopted outside my own little world. Comments?
Given that these disclosures have started to settle down into a slightly more regular pattern, I will be expanding my analysis to look at more areas. In particular, I intend to look at what the actual content of the numbers is saying about the risks embedded in each of the banks. As the vast majority of the numbers relate to credit risk, this is where I am forced to concentrate.
Firstly, though, a big warning to all. All of these numbers below are based on the disclosed numbers as I have read and, in some cases, aggregated them. They are not in any way official numbers from the banks and you should go back to the source documents (as linked previously) if you want to look at them seriously. As all of the tables I have used have some variations across each of the documents I may have mis-interpreted the numbers in some way. If you spot one, or merely have a question, please put it in comments or contact me on the email address given on the “Authors” page.
There are also a few oddities in the data that make me question my own numbers. So, please, do not rely on these and I will not be interested in any claims that you made any financial decisions based on the below. It’s a blog post, for heaven’s sake.
Disclaimer over – on to the numbers.
You would have heard me by now praising CBA’s disclosures, so I will not bore you again with them. OK, I will – yay, CBA. Keep at it. It is just a pity the government guarantee means that you will not be rewarded for it, but, chin up, it will go soon (I hope).
Just a quick reminder here, though. All of the numbers and discussion below is given relative to other banks in Australia. If you compare these numbers to almost any other in the world today you will find the Aussies are far better than most. None of the Oz banks are even trading close to making a loss. Westpac, for example, had the best return on equity of any major bank anywhere last year – and the others are not far behind.
NAB and CBA
The numbers from these two, though, are a study in contrasts, While they have much the same sized portfolio overall (NAB is slightly bigger overall), CBA is more weighted towards the housing end and NAB towards business. In the good times, this served the NAB well in profitability, but it is now hurting in terms of impaired assets and arrears. NAB, despite having only about 16% bigger book (in EAD terms) has about 50% more impaired assets. It also has more loans at over 90 dpd, although CBA, because of its bigger book size, has more residential mortgages overdue. Oddly, though, this has not followed through into the impaired category. My guess here is that many of the NAB’s residential mortgages were used to back business loans, which have been more likely to get impaired quickly.
The rest of the assets story is more or less as you would expect. NAB has many more of its assets in the Standardised categories, mostly because they have substantial overseas assets that they (presumably) have not been able to get a model approved for as yet. If they do not soon do so it may make sense to dispose of them to someone that can.
Overall, 22% of their assets are held in Standardised portfolios, as opposed to 6% average for the others. more work required here, I would have thought.
None of the rest is startling, So I will put some more push into completing the analysis on the overall comparison.