NORTH VANCOUVER, B.C.-Loan loss is low at North Shore Credit Union here, but the $1.4-billion credit union is responding to an upward tick in delinquencies with the help of interest rate and credit risk software.
"We haven't needed to use the loan loss reserve that we set aside each year because our interest rate risk policy and practices have allowed for stable margins," explained Bill Keen, VP-finance and CFO at North Shore, which offers an array of personal, mortgage, business and commercial loans.
"But now we're seeing more delinquencies emerging in the commercial arena," Keen continued. "And though I think it's not as bad in Canada as it is in the U.S., we're becoming a bit more discerning about the deals we accept."
Credit Risk Tools
North Shore uses "pretty typical" credit risk tools, including lending decision-tree software and data warehouse reports in Microsoft Excel, to help make judicious lending decisions, although many loans are still assessed by underwriters, said Fred Cook, CIO.
And the credit union has employed an interest-rate risk solution for a decade, "helping the credit union to consider how changes in the business environment and interest rates may impact the loan and deposit portfolio. For example, an increase in interest rates may shift our member's preference towards more short-term deposits," said Keen.
"The alternative to an automated solution would be guesswork and personal preference," he added. North Shore uses the interest rate measurement solution provided by SunGard Data Systems of London, England.
The tool can calculate the profitability of a portfolio over a twelve-month period on a monthly rolling basis, under various interest-rate scenarios, said Keen. It also determines the mean and standard deviation of 300 rate-scenarios.
"Then we use that standard deviation as a benchmark for determining the earnings at risk," he explained. "This ensures that the risks within our portfolio are consistent with our strategy as well as within our policy limits."
North Shore also uses the tool to conduct shocks to see how sudden shifts in interest rates 1% or 2%, up or down, will affect financial margin projections, Keen said. North Shore can then respond, in the case of expected falling rates, for example, by stimulating longer-term loans, he said.
The credit union tends to shy from adding a horde of consumer behavior variables to the analysis, said Keen. "If you change too many variables, it becomes difficult to isolate what exactly is impacting the results."
Shifts In Consumer Behavior
Still, Keen considers shifts in consumer behavior when necessary, he said. For example, "we might paint three scenarios if we think that members will start making more shorter-term deposits. One scenario would include the base case, one with more aggressive asset growth and one with more conservative asset growth."
North Shore looks at loss - analysis manually on a case-by-case basis; automation just isn't necessary, said Keen.
However, Keen said that the credit union's new core system will allow him to improve the credit union's profitability model by incorporating daily hurdle rates instead of the current monthly average hurdle rate.
An organized history of the credit union's risk experience would also be helpful, he said. "I'd like to look at our individual loan transactions as well as industry stats over the years to see where we've been and what we've done. That would help us make better decisions going forward."
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* www.sungard.com
