BACK TO BASICS:
CREDIT MANAGERS BENEFIT FROM GOOD FOUNDATIONS
The last year has seen wild swings in markets even as many of the economic fundamentals remain strong. Looking to the year ahead, Chris Maudlin of Wintrust Specialty Finance and Mic Mount of U.S. Bank Equipment Finance both recommend credit managers stick to the tried and true, especially when faced with potential upheaval.
According to the November’s Credit Managers’ Index (CMI) from the National Association of Credit Management, sights are set on “some consistent concerns” in the index’s unfavorables as 2018 comes to a close. What does this mean for 2019?
CHRIS MAUDLIN: Given where we are in the cycle, we are all looking for any sign that could point to a potential slow down. While the unfavorables remain near contraction levels based on the survey, the numbers are not significantly different from those at the same point in time from the prior year (this holds true for the December survey results as well). The underlying theme with the consistent concerns is that we all realize that the later we get into this cycle the likelihood of a slowdown draws nearer.
In addition, when you consider the length of this current expansion cycle, the uncertainties regarding trade, the effects of the ongoing government shutdown, potential rate fluxuations along with other macro events, a sense of uncertainty inevitably occurs. This uncertainty and the length of the cycle seems to have us anticipating and expecting the next bit of negative news or update will be the event that pushes us over the edge.
MIC MOUNT: As we enter 2019, lenders should continue to closely monitor the direction of the CMI, closely monitor the direction of the unfavorables and actively manage their portfolios and payments.
Although there has been minimal volatility in the CMI over the past couple of years and the combined reading of 55.8 indicates general expansion, accounts placed for collection and dollar amount of customer deductions remain in contraction territory. These readings below 50 suggest an increase in difficulty collecting payments and/or cash flow problems of customers. Of greatest concern is the decline to 48.2 for accounts placed for collection, which is also the lowest reading for the category since February 2017. Despite this, the overall combined unfavorable rating of 50.9 suggests expansion, and the combined unfavorable rating has not been below 49.0 since November 2016.
In year nine of an expansion, are you doing anything differently?
MAUDLIN: At this point in the expansion, we have made it a real focus to stick to our fundamentals of good underwriting and stay within our defined risk tolerances. We understand that we have been in an exceptionally long period of growth and that the delinquencies and defaults are bound to rise. Therefore our focus has been internal to maintain a consistent credit culture that both serves our customers by providing them stable funding and consistent product while at the same time ensuring our portfolio performs within our expected levels.
MOUNT: At this stage, liquidity is prevalent and competition amongst lenders is fierce. To succeed, we must respond quickly and be willing to work with our clients in document negotiations. Here at U.S. Bank Equipment Finance, we have an intense focus on the client throughout all functional areas of the organization and continually seek efficiency gains in our credit decisions and responsiveness. Using data analytics and historical through-the-cycle portfolio performance, we have increased our application-only thresholds in certain segments, creating efficiency without a material increase in risk. Although portfolio performance remains strong, we continue to perform thorough due diligence and stay within our defined risk appetite.
What do credit managers need to be aware of going into 2019?
MAUDLIN: Fraud seems to be becoming a bigger issue again. We seem to be at the point in the cycle where access to credit is becoming easier and there are unscrupulous groups that capitalize on loosened standards for their own gain. Some portion of the increase in fraudulent transactions may be attributable to the transition to a more customer friendly underwriting process. I am not saying this is wrong by any means, rather in the transition to finding solutions to facilitate transactions and improve the customer experience there may be gaps initially in the processing that are being targeted and exploited by potential fraudsters.
From a standpoint of what can we do to protect ourselves, I think it is imperative for management to support their credit and operations staff if there are issues or discrepancies that need to be addressed versus moving a transaction forward. In addition, prior to incorporating new streamlined processes that improve the customer experience, it is valuable for management to consider potential deficiencies in the process or services and have an appropriate solution in place for how to manage and mitigate the identified deficiencies.
I do think it is important to note that improving the customer experience is a necessary and worthwhile endeavor. However it is imperative that credit managers take an active role in helping to find solutions to enable their organizations to improve the customer experience without materially increasing the risk.
MOUNT: The economy cannot expand indefinitely and recessions are bound to occur periodically. So, we need to remain prudent and disciplined in making decisions and supporting our companies’ business objectives. Credit managers need to stick to their credit appetite, don’t let their guards down and pay close attention to leading economic indicators.