Jeff Judy

Jeff's Thoughts - February 8, 2017

Questions and Answers

What do you look for in a credit analyst? What is top of mind when hiring staff into these positions?

Most of the time, we start with number-crunching skills. We welcome a knowledge of accounting, and we think in terms of answering the basic questions of financial statement and cash flow analysis. And that's appropriate.

We want answers to "what" questions: What liquidity does the borrower exhibit? What is their debt burden? What is their current cash situation? What are the trends in these and other indicators over recent years?

All important questions, no doubt, and we depend on our analysts to answer them.

But in my experience, the most useful credit analysts see these answers as the starting point for other kinds of questions, like "Why?" and "How?" and "What if?"

First of all, why are the borrower's numbers what they are? Can we see what the borrower has done to produce these trends? What if something changes in market conditions, in competition, in other external factors? Do we have any evidence to predict how the borrower will respond, and what impact that will have on future financial statements and cash flow?

How could the borrower produce better numbers? Does the leadership team have the skills to actively manage cash flow for better results, even given the same level of sales?

Now, an analyst can answer some questions of this sort. Others require further inquiries by the relationship manager. And not every possible question about the borrower is likely to get a clear answer. The borrower's patience, and even their understanding of their own financial data, impose limits on how thoroughly we can pursue all these loose ends.

But it is surely better to have a longer list of good questions, and to choose the most important ones, than it is to have just the same few generic items of standard analysis.

That's why I believe that the differences between an adequate analyst and a highly effective one is rarely in their level of accounting skills. It is more a matter of mindset, of the goals they bring to their job.

Some analysts (and some institutions) see the job description as "figuring out the numbers," coming up with a neat package in a standard format that's easy to interpret.

Others see their goal as "understanding the borrower and their business." These analysts are quick to notice gaps in information, inconsistencies in the borrower's story, things that do not quite add up. And they provide opportunities for those gaps to be filled, by the appropriate staff. That could mean a sounder decision. It could mean a wiser structuring of the credit. And it could mean that additional opportunities to serve the borrower with other products and services are uncovered.

I'm all for answering questions. But sometimes we are too quick to stop with the first answers we get.

I suggest you keep "understanding the borrower" in mind when you hire, train, and manage your credit analysts. The right mindset can help the entire credit team, and lead to both expanded and more reliable revenue for your institution.