Risk Analytics and Portfolio Management Advisory
As the product sets offered by commercial and retail banks and other financial institutions have progressively become more complex and as the pressure of competition has risen, the business of banking has become increasingly dependent on analytics. Nowhere in banking is analytics more prevalent than in risk management and decision making on a risk-adjusted basis. Risk analytics encompasses market risk, credit risk and operational risk.
For decades commercial banks have originated loans to borrowers and held them in their books, a ‘buy-and-hold’ paradigm or securitized the loans but held a significant first loss piece. In the last five years, the credit capital markets have opened up and grown so rapidly that a bank is, for the first time, in a position to alter the risk profile of its credit portfolio by participating in the credit capital markets. Not only can a bank hedge its over-exposure to a particular obligor or a particular sector but also it can take on exposure to a particular company without having to create a direct relationship with it. Moreover, the feedback from the credit capital markets can inform and provide a sanity check for pricing of loans in the field.
Promontory’s risk analytics practice focuses on strategic analytics which lies at the intersection of analytics and strategic decision making in financial institutions. Analytics plays a significant part in the solicitation of potential customers, informed pricing of products, measurement & management of portfolio risk, performance evaluation, decisions to invest more or less in a product line and strategic planning for growth organically or through acquisitions. The practice derives its motivation from the need to avoid oversimplification for, as H. L. Mencken observed: “For every complicated problem, there is a simple solution – and it is wrong.”
Incorporating measurement of risk, through risk analytics, in all decision making increases the contribution of each decision to the ultimate objective of shareholder value creation. While traditional financial accounting variables are important measures of performance, they are not sufficient to ensure the maximization of shareholder value.
Promontory’s portfolio management practice focuses on active credit portfolio management strategies by commercial banks with the objective of optimizing overall risk-adjusted return through participation in the credit capital markets. Since these capital market credit products are complex, analytics often plays an important role.
Promontory professionals include former bank executives, former regulators, securities experts and academics with either strong analytical background or expertise in the use of analytics at high level decision making and in credit capital markets. Several Promontory professionals have PhDs in their respective fields and are well published. This practice is led by Ashish Dev, former Executive Vice President of risk management for KeyCorp.
Promontory offers a comprehensive list of customized services that help banks understand and measure risks and risk-adjusted returns through the use of analytics, in order to improve overall performance. We validate models where the analytics is model-based, provide advice as to the use of risk analytics to create a competitive advantage in customer solicitation, pricing and portfolio performance. We do briefings to executives and Boards of Directors of financial institutions on shareholder value creation. We analyze credit portfolios and offer suggestions to optimize portfolio credit risk, thus enhancing overall risk-adjusted returns. We also provide advice to banks to foster a greater understanding of the complexities of structured credit products including securitizations.
