WASHINGTON - Institutions that micromanage their consumer credit portfolios by using customer-specific data have been able to reduce their writeoffs while maintaining returns, according to a report on industry best practices released Tuesday.
These same banks have begun to consider more than just the probability of writeoffs when they conduct risk assessments of their consumer credit portfolios. They have recognized that other factors, such as the rate of customer attrition, can be managed to improve value.
The study also said that while best-practices banks are realizing higher profits on their consumer credit portfolios in good economic times, they are also likely to weather an economic downturn better than their less-advanced competition.
Sponsored by the industry trade group Robert Morris Associates, the study called on banks to consider risk and return as elements of a portfolio that can be managed in tandem.
"Historically, banks have always managed risk and return separately. We have found that at a greater level of sophistication, they can manage risk and return together," Robert Morris president Allen W. Sanborn said.
The key to this evolution of consumer credit portfolio management has been the availability of information.
"It is all about using customer-level data that was not available just a few years ago to differentiate the way you treat customers," said Peter J. Carroll, a managing director of Oliver, Wyman & Co., which conducted the study for Robert Morris.
"Banks have started to realize that not only can you look at large corporate loans this way, but you can apply it at the consumer level as well."
The study encouraged banks that are lagging behind the best-practices institutions to "redefine risk as the potential to lose value at the customer, product, and portfolio levels."
Because factors such as customer attrition and declining use of the bank's credit products represent as much a risk as chargeoffs do, banks should integrate their marketing groups into the risk management function.
By tailoring product offerings to make them more attractive to individual customers, "you can manage even more actively than you manage the commercial side," Mr. Carroll said. "And you can keep your hands on some of that value."
Risk managers should pay less attention to avoiding chargeoffs and more attention to ensuring that the models used to calculate a portfolio's risk are valid, the study concluded.
"Different risk models are proliferating rapidly, and they are only going to grow in importance," said George S. Morris, also a managing director at Oliver Wyman. "Corporate risk management needs to catch up and get a handle on modeling."
Finally, the report recommended that banks apply the approach recommended for consumer credit management to their entire product line "in search of opportunities to optimize the risk/return of the overall balance sheet."
The study was based on analysis of a 140-item questionnaire completed by 38 banks, which hold more than $1 trillion of consumer assets. Among the banks participating were Chase Manhattan, Citibank, PNC Bank, Bank of America, First Union, Royal Bank of Canada, and Toronto-Dominion Bank.
Oliver Wyman selected, but did not name, 17 "leading-edge practitioners" from the group and interviewed representatives to compile the report. The consulting firm also interviewed 15 other experts including equity analysts, academics, and regulators.