Credit cards has always been a significant business line to financial institutions. Your team is responsible for actively managing the balance betwe
Credit cards has always been a significant business line to financial institutions. Your team is responsible for actively managing the balance between risk and reward for banks credit cards business with 12 million clients and various credit card channels. Your first assignment is to perform supporting analyses and create a five page presentation (in legible font size) on the performance and risks present in credit cards Branch strategy over a two year period (The data provided was generated on May 31st, 2020).
Part 1: Modeling
You are required to generate the Resilience Rates and Unit Loss Rate Grades for the various segments provided. Perform your analysis on Month on Book (MOB) of 24 months (18 months of actual data and 6 months of projected data)
Resilience Rate = Net Income Net Credit Losses
Unit Loss Rate (ULR) per open = Write-off Accounts Restated Count of Accounts
Month on Book (MOB) = Number of full calendar months that have elapsed since the end of the applicable Vintage Period
By way of example only, on April 30, 2020, the January-March 2020 Vintage would have Months on Book of one (1), and on June 30, 2020, that same Vintage would have Months on Book of three (3)
More explanations and relevant formulas can be found in the Excel workbook attached. Hints:
When calculating revenues and costs, what items are one-time only and what are ongoing?
Consider the scales of metrics do you have to convert anything?
Describe what happens to the data after the 18 MOB data point? Are you able to detect any trends?
Please list any additional information and data that you would require to improve your model and to expand your analysis of the subject and its potential impacts on bank.
Part 2: Risk Management
What types of potential risks is the credit cards portfolio exposed to?
If you were a risk manager of credit cards portfolio during the Financial Crisis and COVID-19, what were some key metrics you would focus on first? Would you take different risk mitigation measures under these two scenarios? Now look retrospectively, any lessons learned for future risk management?
What are the top macroeconomic risks (pertaining to credit cards business) you would focus on currently?
Part 3: Business Strategy
1.You were asked to propose business strategies to increase credit cards net incomes before taxes, what would be your recommendations?
Before you start, your manager provided you with some advice on how to prepare the presentation. Your manager explained that for similar types of ad-hoc analyses, senior leaders would expect to see the following components:
Data driven insights and key takeaways on historical trends
A formal model to explain factors for credit cards portfolio performance with data provided
Shortcomings of the model and techniques used
When answering questions of risk management or business strategy, try to think of the big picture how the portfolio performance of credit cards can affect other departments within Bank.
Finally the presentation must fit the following criteria:
Maximum 5 slides (excluding cover page, including appendices) in legible font
Notes:
All the bank related data was made up. There are more components in the actual models. The data points and concepts in the case were simplified.
Not all data provided is meaningful or useful. Make assumptions if necessary.
Restated means your account is either Open or in Collection; and to be defined as Active at the end of a month, you will need to have non-zero average daily balances.
Formula for calculating Net Income Before Taxes:
Net Income before Taxes = Revenue - Cost - Net Credit Losses
Fee Income Funding Cost Net Credit Loss
Annual Fees Cost of Funds Reward Expense
Over-limit Fees Transaction Income Operating Cost Interchange Marginal Operating expense
Foreign Exchange Interest Income Product specific cost Finance Charges Cost of rewards Insurance cost Network Fees Sign up incentives
