Credit Risk

Credit Risk

1. Three Lines of Defence

   • First line of defence • Anyone with direct contact with customers • Front line’ business unit or area originating risk
   • Second line of defence • Implements frameworks, policies, limits and processes for management, monitoring and reporting of risk • Evaluates 1st line and remediates any deficiencies • Credit - ensuring credit policy is being adhered to or that anything outside of policy is acceptable • BLO - ensuring we are doing what credit instructed
   • Third line of defence • Independent assurance function • Evaluates 1st and 2nd line risk management • Tracks remediation • Provides comfort to Group’s Board that end to end risk identification, management and controls are adequate and operate effectively • Policy, Risk Board, Credit Risk Review and Policy makers

2. Risk Types

   • Credit risk - The potential for financial loss where a customer or counterparty fails to meet their financial obligations to Westpac.
   • Market risk - The risk to earnings from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices.
   • Operational risk - The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
   • Compliance risk - The risk of failing to comply with all applicable legal and regulatory requirements and industry codes of practice, and meet our ethical standards.

3. Four Risk Factor

   • business risk factors
     • • Major acquisitions • Growth, planned or unplanned, beyond historical levels or industry averages • Idle, surplus or aging equipment and equipment • Inability to meet customer and demands and external factors • Over-diversification at the expense of concentration on a core product • Reliance on one or few key customers or suppliers 
   • external risk factors
     • • Economic conditions affecting availability of credit and / or consumer confidence • Technology changes within the industry, it may for customer to upgrade plant or redesign its product • Changes to the industry structure • Changes to government legislation or regulations • Entry of new competitors or substitute products damage the pricing structure of the industry
   • financial risk
     • Limited access to funding • Facility structure inappropriate • No understanding of profit v cash flow • Our customer relies on longer supplier credit terms • Suppliers tighten trade credit terms • High fixed cost structure (including excessive fixed asset capacity and / or vertical integration) • Unexplained or excessive increase in debtors days • Unexplained or excessive increase in inventory days • Reduction in sales volumes or revenues • Reduced profit margins or a reported trading loss • Lack of working capital and liquidity • Difficulty in settling tax liability payments, or undue delay in remitting employee or company tax withholding • Requests to postpone principal repayments • Shortening debt maturities and continual hard core excesses • Cash balances down; run of account confirms less liquidity • Casual overdrafts and / or excesses over facility limits
   • management risk
     • Absence of strategic plan, or constant changes to the plan or budgets • Lack of succession planning • Inter-generational change • Size and complexity of business has out-stripped management ability • Poor MIS, particularly for financial information • Lack of depth in management, reliance on one person • Adverse comments from competitors, suppliers or customers about the integrity or capacity of management • Continual urgent requests for excesses / dissatisfaction with treatment by other lenders • Refusal of permission to talk with auditors, accountants or other professional advisers / unavailable (or reluctance to provide) management information; poor financial controls; delayed / qualified annual financial statements Excessive turnover of key management employees or directors, resignation of auditors or other professional advisers, change in ownership • Excessive life style or expenditure outside the core business, excessive management fees or dividends

4. The Risk Analysis Process

   • Industrial and Business Analysis
     • External
       • Environment
       • Industry
     • Internal
       • Financial Capacity
       • Management Capacity
     • SWOT
   • Risk Classification
     • Risk and Mitigants
   • Deal Structuring
     • Loan Structure
   • Conditions and Convenants
     • Conditions and monitoring