BAO3404 CREDIT AND LENDING DECISIONS
Section A: Background
You are an employee of Advance Bank, a major financial institution. Currently employed in Advance Bank’s corporate banking division you are part of a small team responsible for managing the bank’s relationships with major corporations. Such relationships can include providing lending facilities, trade finance, money market and foreign exchange services, transaction facilities including payroll and electronic banking services for the corporation’s client relationships. From interest income and fees for service the institutional banking division is able to generate a healthy contribution to Advance Bank‘s annual profit. Advance Bank is keen to expand its presence in the corporate banking sector of the financial system, and has been actively seeking new corporate clients.
While it seeks to win new business, Advance Bank executives have determined that its traditional conservative approach to accepting risk will not be compromised. Accordingly, any facility approved outside Advance Bank lending policy must contain a clear rationale for acceptance of the business including all aspects outlined in Section B. Approval for such facilities can only be given by the Advance Bank Credit Committee, comprising the Chairman and 3 other non-executive board members.
Section B: Project Brief
Corporate Lending Teams at Advance Bank have been given responsibility for reviewing and assessing the new lending applications recently received. Recently, your team has been asked to provide the lending submission for your chosen company. Your recommendations in the written lending submission will go to the Directors Credit Committee for approval or rejection. Advance Bank uses a standard format for the lending submissions (see below).
Background details What is the name of the borrower?
What is their address?
Who are the major shareholders/unit holders/beneficiaries?
Overview of the borrower What are the current borrowings (if an existing borrower)?
What is the history of this borrower?
If the borrower is not an individual, then who are the individuals behind the borrower? What does the borrower do to generate income?
What are some of the key characteristics of the business (number of employees, products, location, number of competitors, management, marketing and so on)?
How has the business changed over time?
Industry analysis A commentary on the industry, ending with a statement about the key success (strength) factors and key sensitivities (risks) of this industry.
The nature and extent of competitiveness in the industry.
In this section you can also provide commentary on the state of the economy (domestic and international) and how it will affect the borrowing company, identifying the risks that these conditions present.
A discussion of ways of mitigating the identified risks should be provided.
Financial analysis Analysis of the historical financial (statements of financial position, statement of financial performance and cash flow statement). This analysis should always focus on the ultimate identification of risks (rather than on detailed quoting of numbers).
Comments on the statement of financial position and statement of financial performance should be made under the broad headings of ‘short-term liquidity’, ‘longer-term solvency’ and ‘business performance’.
A cash flow statement, if not provided by the customer, may be generated by the lender and discussed here.
Security Identification of the key credit issues that come out of the existing security structure.
Details should be given as to the different items of security and the lending margin that is available overall on this security.
A concluding comment should be made about the strength of the second way out (security).
Recommendation A clearly justified recommendation, including a list of relevant covenants and the strength of both the first and second ways out for the proposed borrowings should be clearly noted as either a strength or weakness. A discussion of the proposed facility structure and proposed pricing is also warranted.
Section C: Prospective Client – Submission received for Analysis
Name of the company: JB HI-FI
Website: https://investors.jbhifi.com.au/annual-reports/
Lending request: 50 millions to open new stores
Section D: Further Information
The request for funding is hypothetical, although your lending submission is based on a real company. The predominant source of information for your lending submission will come from the company’s website. However, teams are expected to obtain relevant information from other sources when providing an analysis of the operations of the company in question. Reference to industry association reports and commentary about industry analysis provided by other reputable sources is an expectation of the Credit Committee of Advance Bank.
Use the 2019 ANNUAL REPORT for your lending submission.
When analysing the historical financials, the Credit Committee requires the use of data from the last THREE years (2019, 2018 and 2017).
Information in excess of the word limit will be gathered, but your team must present a clear, concise and focused analysis of this information. The use of tables, charts and diagrams is an essential component of these submissions. You may use any pricing model to determine the interest rate on the proposed funding.
Various pricing models will be discussed in class. Central to your team’s report is risk assessment and ways your team can mitigate these risks. You will be required to provide detailed financial analysis. The Credit Committee pays particular attention to the quality of analysis and especially looks for examination of trends and changes that have occurred.
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