GLOBAL RISK SOLUTIONS
Combining comprehensive investment risk services that help you monitor risk across your investment process with integrated performance solutions that help you compare, evaluate and understand the impact of your investment decisions.
Manage and Mitigate Risk
Aura Risk View SM
Exposure and Structural Analysis
Analyze Investment Decisions
The Jeeranont Groups
How quickly things change. At the end of April, investors seemed confident that the U.S. and China would reach a trade deal and that the Federal Reserve would keep easing monetary policy—two major expectations that may have driven the S&P 500 to a 17.5% gain in the first four months of 2019.
In early May, however, U.S.-China trade tensions have escalated significantly, Fed policy seems much more neutral, geopolitical risks have risen—in Iran, North Korea and Venezuela—and for the moment, stocks have faltered.
Volatility has reawakened, amid greater potential for global growth to slow and stocks to suffer. But opportunities may also surface in some areas, such as emerging markets. Investors need to keep close watch on market events, as the outlook evolves. Below are three keys to understanding market direction:
China and the U.S. are on different economic trajectories: When trade tensions escalated in 2019, China’s economy was slowing, while U.S. growth was strengthening. Currently, with its economy regaining some momentum, China may be better able to weather prolonged trade tensions than it was a year ago. Meanwhile, the benefits of tax reform are fading in the U.S. Ultimately, I think the U.S. and China will reach a trade deal, but it may take a while.
U.S. corporate profit growth is weaker: Companies are facing higher costs—not just from tariffs, but also from more expensive labor and materials, which are contributing to shrinking profit margins. At the same time, expectations for corporate capital spending have been falling. That trend could worsen as geopolitical uncertainty increases.
The Fed seems less likely to cut interest rates: While a rate cut might help if the U.S. economy weakens due to trade conflicts, the Fed may be reluctant to make that move. Tariffs contribute to rising prices, and a rate cut would likely exacerbate inflation, which the Fed tries to keep under control. A rate cut might also cause investors to question the central bank’s independence, as the current administration has been vocal on that topic.
Investors shouldn’t necessarily fear any flare up in volatility kindled by the latest round of geopolitical risk. As that risk is priced into markets, opportunities will arise. For example, emerging market stocks, which are hurting now, could benefit once a trade deal is reached.
We help financial institutions manage risk along the entire credit value chain, addressing challenges and opportunities related to origination and underwriting, credit portfolio management, loss mitigation, and credit modeling and advanced analytics.
Managing credit risk is always a complex challenge—one that becomes even more complex against a backdrop of market volatility and evolving regulatory guidelines. We help clients maximize returns from their credit operations by applying our expertise in:
Credit strategy, organization, and portfolio management
At an average commercial bank, credit-related assets produce about 40 percent of total revenues; credit-related costs, including provisions and write-offs, account for a significant fraction of expenses. We help clients increase revenue and minimize costs by supporting the development of sound credit-risk strategies, organizational structures, and portfolio-management processes. Our recent projects have included:
helping a client define its risk appetite for large-corporate credit underwriting
devising decision criteria to yield profitable growth in a client’s consumer-lending business
transforming portfolio-level credit guidelines into actionable loan policy
optimizing the design of a bank’s credit-portfolio-management unit
Well-designed credit processes can reduce operating expenses by 15 to 20 percent and risk costs by more than 20 percent, while improving customer experience. We have extensive expertise in optimizing credit processes (origination, underwriting, pricing, administration, monitoring, and management) across all customer segments. Our approach combines a deep understanding of business and credit-related issues with proven lean techniques. Examples of our process-optimization work include:
helping a commercial bank with an end-to-end redesign of credit processes for the retail, small and medium enterprise (SME), and corporate segments
developing best-practice capabilities for SME underwriting by improving processes and creating advanced statistical models
Financial institutions must proactively manage potential credit losses to sustain value, especially during volatile economic periods. We help clients design and implement effective strategies for every stage of the collection process, from early delinquency to work-out. When necessary, we also create targeted approaches for asset disposal. Our projects typically reduce the cost of risk by 10 to 20 percent. Recent projects have included:
introducing behavioral segmentation and developing differentiated recovery strategies to maximize recoveries on retail and commercial loans
“ring-fencing,” evaluating, and preparing the sale of large nonperforming loan (NPL) portfolios
Advanced analytics for credit
Banks increasingly require deep analytical insights to understand the value and risks associated with their credit portfolio, as well as to respond to market fluctuations and regulatory requests (for example, stress testing and capital management). We have more than 40 analytical experts in Europe and Asia dedicated to helping clients develop specialized models that can be applied either to individual loans, portfolios of assets, or a bank as a whole.
Among other projects, we have helped retail banks create behavioral models to drive credit underwriting and monitoring. We have also developed asset-specific models to assess the value of specific portfolios under different scenarios.
Credit surveys and benchmarks
Our clients can participate anonymously in a wide range of surveys covering all major aspects of credit risk, including organizational effectiveness, credit processes, risk model performance, and portfolio management. These surveys allow clients to benchmark their performance against a group of relevant peers.
Credit diagnostic. The credit diagnostic benchmarks the quality of end-to-end credit processes (including risk selection and customer excellence) as well as their operational efficiency, against that of peers. It helps identify key areas for optimization and serves as a starting point for defining specific improvement levers.