Strategies, Best Practices and Thought Leadership

While Chasing New Originations, Financial Institutions Must Manage Existing Portfolios

As we head into the second half of the year, banks and credit unions must have a solid understanding of their existing portfolios and where their profitability is. Risk management will be crucial to remaining profitable, especially as the industry recovers from the downturn caused by COVID-19.

Additionally, the yield curve is flattening. Historically, an inversion where short-term rates exceed long-term rates has followed every recession since the Great Depression. This could be problematic for banks, as they may be forced to pull back from lending. We’re also seeing inflation, home sales are declining in many markets, and delinquencies, especially on credit cards, are rising. These factors point towards an increase in non-performing loans.

In addition to the economic downturn, banks and credit unions are in a particularly tough spot. Today, they are also competing with alternative lenders like Kabbage and OnDeck, creating an even greater need to supercharge profitability while lowering risk and loss.

Because of the current environment, many financial institutions have started examining risks. Even with discussions around the economic downturn, many financial institutions are still talking about growing. As financial institutions are looking at growth strategies, managing portfolio risk should be in the forefront of strategic decisions. There should be a focus on protecting portfolios and managing risk – what processes, policies and technologies are in place to exit problem credits before they become an even bigger problem as they look at the most effective ways to grow.

From a technology standpoint, portfolio risk management tools will be critical to help manage credit risk before it becomes problematic. While many institutions have something in place, they typically leverage multiple, disjointed systems for loan origination and portfolio risk management, limiting their ability to truly maximize profitability. This often forces financial institutions to make tough choices as to where to focus their investments and resources. Often times, priority goes to origination technology, especially when institutions are in heavy growth mode.

Financial institutions must also seek out technology that provides continuous, automated portfolio monitoring. It is becoming increasingly vital that banks and credit unions monitor accounts on a daily, weekly, monthly, or quarterly basis – with significantly less manual intervention that ties up resources and creates cost burdens.

Leveraging powerful data is also critical. Managing risk and enhancing processes can be better achieved through current and accurate bureau data, loan, deposit and collateral data, as well as financial statement data, from internal and external systems. With a true, 360-degree view of their portfolio, banks and credit unions can make more strategic, data-driven decisions, such as identify problem loans before they become delinquent.

Additionally, data not only allows institutions to make better decisions, but it can offer greater insight into the profitability of that borrower. As a result, the institution can potentially provide relevant services to help support that borrower, thus preventing that borrower from going into delinquency.

While spotting trouble accounts, institutions must also monitor for high-performing loans for renewals and cross-selling, as well as to know what types of loans or businesses are thriving. This can provide great, data-backed insight into where financial institutions are most profitable and where they should focus on.

By managing existing portfolios effectively and efficiently as they work to grow their portfolios, financial institutions will be better positioned for profitability, regardless of the economic climate. As the industry faces a downturn now or perhaps stagnant growth, the industry is cyclical. To protect against fluctuations, financial institutions must examine what strategies and technologies to invest in for greater profitability and lower risk. More important than ever is to know what is making money and what is not. With powerful data and automated portfolio risk management tools, banks and credit unions can better evaluate their portfolios to identify problems and make strategic decisions long term.

 

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Baker Hill

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