Being an Analyst
Every person I have ever spoken to in the banking industry in relation to the Audited Financial reports for SMEs, responded by stating these reports are all goofed up by auditors and / or management and thus are not reliable for decision making.
To be honest, I agree on that as I have come across transactions wherein I came across 2 sets of audited financials issued by 2 different auditors for the same company and for the same period but with completely opposite figures. So, no question on that.
But, as an analyst or a credit minded person, can’t we test such financials and adjust them to realistic figures based on what we evidence. Yes, you can.
To test the income statement for e.g. you can verify the revenue figures with what is routed through the bank accounts (of course not everything that is routed through is revenue but you as an analyst can test that as well), margins and terms can be tested from random large invoices issued by the borrower to the customers, or by the suppliers to the borrowers (recommend taking 5-10 full transactions for the review randomly), expenses from documentary evidences (payroll from WPS / Rent from Tenancy contracts). By doing this you verify the real profit that the firm generates or can generate.
To test the balance sheet for e.g. you can verify the fixed assets and its values with what you see and desktop research (I remember coming across a fixed asset valued at AED 20M when a quick google search indicated a value of not more than AED 2-3M for the similar fixed asset), the cash balances with the bank accounts as of that date, receivables with the ledgers, the invoices, the bank statements and ageing (this is tedious but I have caught major fraud cases through this test), inventory with invoices and ageing and what you actually see in the warehouse / office (you can’t miss that) and remove all non-business-related assets. When it comes to liabilities debt can be tested against Al Etihad Credit bureau reports, Ageing payables with invoices and bank statements etc.
By doing this testing and adjustments you can derive realistic financial figures, which can then either be an eye opener in terms of risk or give you the comfort you need to take forward.
So, being an analyst is not just about reviewing what is provided but rather testing and reviewing every aspect of the transaction and not just about blaming the auditor or the audited financials etc. Be an Analyst.
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Credit & Treasury | Controllership | Structured Finance | Financial Modelling | Trade Credit Insurance
7 年Very practical and it can be easily implemented. However due to the sheer size and volume of applicants in SME sector, it does not make sense to spend such efforts on validating every piece of information. Therefore, I believe SME transactions selection is primarily a negative art which means whenever there is a slight bit of doubt, the case should be rejected. Again, in lending avoidance of loss should be the chief emphasis.
Commercial Lending | Financing Solutions | Digital Banking | Corporate Banking | Portfolio Management | Merchant Services
7 年I agree, I would say this is not only Risk team responsibility to do these kind of analysis/scrutiny. A business team should know these basics and this can be one way of bringing/onboarding quality business.