The Credit Analysts in the Commercial Banks - Research Paper Example

The Rhetorical Analysis of Credit Analysis Report Number: After the 2007 financial crisis, loan security issues in banking industry have aroused the public’s concerns. One of the gatekeepers of loan security is the credit analysis report, which is constructed by credit analysts. The credit analysis report provides loan officers a comprehensive and detailed look of the fund demander. This research paper studies the writing genre and the rhetorical features of the credit analysis report, and it also proves the thesis that both of narrative and quantitative analyses should be well-developed in order toform a sufficient credit analysis report. The research efforts are throughout the comparison and analysis on current articles about methodology of writing credit analysis report and real samples, also this study consults opinions from three professionals in the banking industry. This research paper is conducted for those who are engaging themselves to be the credit analysts in the commercial banks as the guideline to prepare for the credit analysis report. Introduction Commercial banks have been playing an important role in the economic stage by channeling the funds from private depositors to the companies which require the funds to set up or extend. The credit analysis report is the professional writing found in banking sectors and some other financial institutions. This report is prepared for the loan officer by credit analysts so that the loan officer can make a decision based on the report, whether to approve the loan and the associated interest rate and repayment period. The credit analysis report serves a main purpose that help the senior officers minimize the risk and threat within the loan transactions. A sufficient credit analysis report does not only reveal the potential risks of lending out a loan, but also secure the public’s wealth. Therefore, the credit analysis report can also be known as the gatekeeper of the loan security. Literature Review According to Lipartito (2011), the genre of credit reporting has been changed and improved from nineteenth century to the modern days. The genre’s movement is identified as the change from narrative analysis to algorithms and regression assessment prediction. Lipartito (2011) listed R.G. Dun & Co. as his example. This credit analysis institution’s report was purely narrative at the beginning. Later, the R.G. Dun & Co. started to collect borrowers’ ledger. From time to time, the credit report has contained wide varieties of contexts, details, and analytical contents. The genre movement introduced by Lipartito (2011) provides two main parts of a sufficient credit analysis report. The first part is narrative introduction of a company that demands for the loan, and the second part is the risk assessment constructed on the company’s financial statement. Moreover, Lipartito (2011) argued that the transparency is the most important factor of the credit analysis report, but accumulating more information within a single report doesnt improve the quality of the report. This research paper will combine Lipartito’s (2011) finding and opinions from the professionals with the banking industry to conclude the most valuable and essential components that should be written in the credit analysis report. In Li and Xie’s (2004) studied the methodology of credit analysis of the SMEs. They pointed out that the “5C” essential elements should be analyzed in the SMEs’ credit analysis reports. The “5C” stands for: “character, capacity, capital, collateral, and condition.” The “5C” analytical method is developed from the American Banker Edward’s “3C” and “4C” methods. Li and Xie (2004) believed that the “5C” elements are most representative and crucial factors of the SMEs’ credit features, and a successful analysis report should be able to evaluate a SME from these five aspects. Importantly, these five elements are the guidelines to test the sample credit analysis reports, because as the article states, every successful credit analysis report cannot leave out the “5C” essential elements. In Rutherford’s (2005) article “Genre Analysis of Corporate Annual Report Narratives”, by using the corpus linguistics-based approach, he found out that the usage of the particular words, such as “revenue, sales, assets, debt, etc.”, can highly influence the audiences’ impressions about the company. Rutherford’s result leads this study to a question, which is that the word selection of the credit analysis report should satisfy the report’s primary purpose. In Nathan Sachritz’s (2011) article, “Top 10 Rules for Credit Analysts”, the author presented ten writing techniques for credit analysts to prepare their credit analysis report. Among these ten techniques, one technique is instructive to this study, and this technique is called “Elevator Effect”. According to Sachritz’s opinions, credit analysis should be careful for the “Elevator Effect”, which means the using of words increase, up, higher, decrease, down, and lower to describe the numerical changes within the financial report. The credit analysts should be able to discover the meanings and implications behind the numbers. This particular technique is helpful to study the rhetorical features of financial analysis. Method In order to analyze the rhetorical features of the credit analysis report, this study conducted primary and secondary researches on this specific topics, and the following sections will introduce the research methods. Primary Research First of all, the study collected three credit analysis report samples through online researching, and the three sample reports are: 1. Wuniangye Group Credit Analysis. Wuniangye Group is China’s liquor manufacturer. 2. Shandong Chenming Paper Holdings Limited Credit Analysis Report. This is a report for a paper manufacturer company, and the report was prepared by China Lianhe Credit Rating Co. Ltd 3. Sample Financial Statement Analysis. This report is a sample demonstration and prepared by Thomson Reuters. Secondly, the study interviewed three professionals, who are special in credit analysis and loan transaction from the banking industry. The first two interviewees are both junior analysts, whose daily works are conducting the credit analysis report. These two interviewees are Jianle Hong, the assistant analysis officer with The Bank of East Asia Limited, and Edmund Fong, the investment opportunity analyst with Morgan Stanly Hong Kong. The interview for Hong and Fong is about the methods and attentions while conducting the report. The third interviewee is a loan officer with the China Guangfa Bank, Guangtao Ye, who is the reader of the analysis report and loan decision maker. The interview for Ye focuses on his opinions about the question what elements in the report are crucial to him. Secondary Research The secondary research aims to find out former studies for the writing of the credit analysis report. From earlier literature review section, two research papers, which are Lipartito’s (2011) “The Narrative and the Algorithm: Genres of Credit Reporting from the Nineteenth Century to Today” and Li and Xie’s (2004) “Credit Analysis and Evaluation of the Small and Medium Enterprises (SMEs)”, were collected to provide this study’s guiding method. In the following results section, these two articles were incorporated with the primary research to provide the structure and required components for the credit analysis report. Moreover, Rutherfor’s (2005) “Genre Analysis of Corporate Annual Report Narratives” reveals the tone and rhetorical features of a financial report, which a competent credit analysis report should share with. In addition, the article “Top 10 Rules for Credit Analysts” (2011) published on “The RMA Journal” is collected to support the research result of this study. Results Identification One of the significant features of the credit analysis report that can distinguish itself from the financial report is the narrative analysis part. While comparing the three samples, it is easy to find that both of the credit analysis reports consist with the narrative parts, which introduce the companies’ business strategies, goals, labor forces, sales activities, production process, etc. However, the Thomson Reuters’ Financial Statement Analysis only consists with the quantitative measurements and analysis on the numbers from company’s balance sheet. As Lipartito (2011) states in“The Narrative and the Algorithm: Genres of Credit Reporting from the Nineteenth Century to Today”, in order to achieve the optimal transparency, a sufficient report should be able to present the narrative and quantitative analysis. In Wuniangye Group and Chenming Paper Holdings Limited’s reports, the structure and two parts of analysis are easy to be identified. Both of the reports start with the narrative analysis, and later move on to the financial analysis. Narrative analysis is the necessary components of the credit analysis report, because this part of analysis can reveal a notable amount of transaction risks. Narrative Analysis As can be seen from both Wuniangye Group and Chenming Paper Holdings Limited’s report, the beginning parts of the reports are the narrative analysis. In these parts, two of the “5C” essential elements mentioned from Li and Xie’s (2004) article “Credit Analysis and Evaluation of the Small and Medium Enterprises (SMEs)” are settled, and the two elements are “Characterand Condition”. Firstly, both reports start with the introduction of the companies, which include the companies’ history, their current business types, production process, products, and sales activities. The information introduced here can be known as the company’s characters. The Wuniangye Group’s report begins with the company’s history by stating that the company was formed by several traditional wine workshops in 1950’s, and later transformed to Wuniangye Group. Later, the report introduces the company’s wine productions process, and the major products. All the information presented in the beginning of the narrative analysis, can provide loan officer with a general impression about the company’s business type. However, one of the important factors is not covered by these two reports, which are the company’s history transactions with commercial banks. Hong mentioned that while conducting a credit analysis report in commercial bank, it is important to list the company’s history transactions with banks, because the transactions show the possibility of a company’s default risk, and a credit analyst should be able to identify the “operational risk and credit risk” when involved in the loan transactions with the company. Secondly, both reports talk about the industries environment, which include the companies’ current status within the industries, country’s policies for the industries, and the industries’ prospective. This element is known as “Condition” in Li and Xie’s article, and this is one of the two most important elements of the credit analysis report according to this study. In Hong’s point of view, the element “Condition” can address the “country risk and legal risk”. For example, Chenming’s report states that “Due to the increasingly stringent national environmental policy, paper making companies’ expenditure for environmental protection will increase. Those companies which do not meet the policy requirements will be eliminated, and other companies will benefit from it.” From the statement above, it is possible to tell whether the analyzed company is against the policy and law. More importantly, it implies the company’s potential growth situation within the industry. As Edmund emphasized during the interview, “growth via competition is an important measurement of our credit analysis report.” Moreover, Ye also views the industry’s development as his main considerations within the report. The element “Capacity” should be described in this part of analysis. According to Li and Xie’s opinions, “Capacity” should be discussed in several aspects, which are “management capacity, labor’s capacity, machines capacity, infrastructure capacity, production capacity and sales capacity”. However, this study suggests that the element “Capacity” can be simplified as three main aspects, which are management capacity, production capacity, and sales capacity. The management capacity discusses the current management’s structure and achievements, and this aspect addresses the “one man company risk” from Hong’s opinions, which means the company with only one manager has greater default risk. Chenming’s report clearly states that the company has already established a fully functional management, all transactions and decisions must be proved by committees before being effective. This statement can fully eliminate a loan officer’s concern about the “one man company risk”. Management capacity should be introduced within the company’s background information; therefore, this study suggests this should be placed in the beginning section of the credit analysis report. Financial Analysis The analysis on production capacity and sales capacity can efficiently predict the company’s ability and required time to repay the loan. The analysis on production and sales capacity require the support of the company’s financial statement, from which the quantitative measurements collected. Nevertheless, different from the traditional financial report, the credit analysis report emphasizes on the meaning behind the numbers, but not the quantity of the accounting ratio measurements. For instance, the report of Wuniangye Group comments the quantitative data about the repay ability, and it states: “In the competitive market, the company’s strong repay ability provides a safety valve for the company and reduces risk. However, the data reflects the company’s liquid assets are too large to the amount of excess current liabilities, which underutilizes funds and may lose some profitable investment opportunities.” As Sachritz (2011) advices, credit analysis should avoid the “Elevator analysis”, which uses the numbers’ up or down to comment on the company’s performance. A sufficient report should analysis a company’s performance by telling the reasons of the changing numbers and the meanings of them. The credit analysis report’s role is to explore the potential risks within the loan transaction and give evidence to prove those risks. The credit analysis report shows the loan officer the reason and behavior of the risk. From Ye’s point of view, he agreed that a company’s operating results is an critical measurement in the credit analysis report. Hong also mentioned the financial result is one of the eight elements that he would write into his report. Finally, the elements “capital and collateral” should be revealed from the financial analysis. One factor called “cash flow” is highly emphasized by both Hong and Ye. During the interview, Hong talked about the “cash flow” and “collateral” as the two important factors that should be written in the financial analysis, and Ye considered “cash flow” as one of the three critical elements he would prefer seeing in the report. Indeed, inWuniangye Group and Chenming’s reports, the capital structures are the major sections for both of the reports. Using Chenming’s report as example, it illustrates the capital structure by presenting the pie chart and listing the detail capitals that it has. Among all the capitals, cash flow is the first priority to be introduced in the section, and then are accounts receivable, inventories, and fixed assets. The sequence of listing depends on the capitals’ liquidity. Edmund explained that capital structure can quickly show the company’s potential collaterals, and more importantly capital structure is helpful to assess the company’s valuation. Word Selection A corporate annual report usually prefers highlighting the profitability to concealing the loss, because it is the tool to attract investors’ attentions. Differently, the credit analysis report is only a tool to help loan officers determine a transaction. The analysis integrates required and available information, in order to show the loan officers the potential risks within the loan transactions. The goal for the credit analysis report is revealing and analyzing, but not judging nor deciding. An extract from Chenming’s report writes that “During 2005 to 2007, the company’s operation revenue ratios are 20.01%, 18.74% and 20.26%. In 2006, some of the products were under low pricing regime, and lead to the revenue stayed at the lower level. However, other products still had strong profitability.” Some words from this extract fit in Rutherford’s (2005) study and these words can influence audiences’ view for this company’s performance. It is more important to notice that words used to describe the company’s profitability are accurate and unbiased. Edmund believed that a sufficient credit analysis report should be able to show loan officers both of the opportunities and risks of a company. The words used in the report should accurately and objectively describe the changes of numbers, which means it has no preference for word selection as long as the word is accurate. Conclusion Throughout the comparison of three credit analysis report samples and combining the three professionals’ opinions along with the former genre study of the credit analysis report, this study demonstrates the structure, explains the implications of the materials, and the reasons for the components to be written in the report. However, during the research period, it was surprising to find out that different commercial banks use different standards to analyze a loan demander, so every bank has different requirements for the credit analysis report. This study provides a general and essential writing guideline for the credit analysis repot, although the genre and rhetorical features in this study may not satisfy every single commercial bank’s requirements, the essential factors and elements that studied by this research should be able to provide a correct direction for those who prepare themselves into the banking industry as the credit analysts. Reference Lipartito, K. (2011). The Narrative and the Algorithm: Genres of Credit Reporting from the Nineteenth Century to Today. Munich Personal RePEc Archive, (28142). Retrieved February 23, 2015, from http://mpra.ub.uni-muenchen.de/id/eprint/28142 Li, X., &Xie, X. (2004).Credit Analysis and Evaluation of the Small and Medium Enterprises (SMEs). Journal of XIAN University of Post and Telecommunications, 9(2), (1007-3264(2004)02-0037-04). Rutherford, B. (2005). Genre Analysis of Corporate Annual Report Narratives A Corpus Linguistics-Based Approach. Journal of Business Communication, 42(4), 349-378. Sachritz, N. (2011, March 1). Top 10 Rules for Credit Analysts What to watch for when preparing a loan committee package. The RMA Journal, 44-45. Read More