SCORE Statistical Consulting Inc. CAGT - Credit and Collections Richard Yap

SCORE Statistical Consulting SCORE Statistical Consulting Inc.Inc.

CAGT - Credit and Collections

Richard Yap

Current State - Economy

"I no longer believe in the market's self-healing power.“ - Josef Ackermann, CEO of Deutsche Bank

“The economy will shrink by 1.2% this year”- Bank of Canada forecast

22 per cent increase in consumer bankruptcies in January 2009 (YOY)- Office of the Superintendent of Bankruptcy

“Hundreds of companies face credit downgrades as the economy erodes their bottom lines”- S&P

Canada's gross domestic product dropped 3.4 percent in the fourth quarter of 2008

Four of the biggest (Canadian) banks set aside 51% more cash on average in the first quarter (2009) for card losses

Total charge-offs expected to hit $96 billion this year, compared with $41.4 billion in 2008 (Innovest – US Forecast)


Current State - Lenders

Deleveraging in the economy - tightness in the credit marketsImpact to home equity, credit cards, and consumer lendingLenders are under significant pressure to reduce loss rates and control budgetsWeigh risk-mitigation objectives against customer retention concerns - higher risk accounts may also be the most profitable customersConsumer credit delinquencies will continue to increase, especially with credit cards – consumer ability (and willingness) to service debt has significantly weakened


Current State - Consumer

Consumer confidence is down:Market volatility Employment and economic uncertainty Reduction of net-worth and asset baseSaving rates are increasingFreeze in credit availability

Cardholders worldwide spent less during the quarter (Q4-2008), as purchase volume dropped 15%, to $102.7 billion from $120.3 billion (YOY)


Source: Statistics CanadaSource: O.E.C.D.

Hierarchy of Payments


Consumers will typically elect to maintain certain tradelines first and let others go delinquent if necessary"Credit card deterioration always happens much sooner and much more dramatically than you'd have in a mortgage portfolio because they are unsecured loans“ - Royal Bank CEO Gordon NixonWhen financial problems worsen, then the choices become more difficultIn the US, some prefer to maintain credit cards and walk away from homesConsumers have become more vigilant in maintaining credit instruments still available to them because of tight credit availability

Lender Strategies – Risk Mitigation

Credit grantors are being much more proactive with risk mitigation efforts

Credit-line decreasesClosing inactive tradelinesSlowing acquisition programs Tightening underwriting requirements

Unintended consequences to credit scores Default re-pricing - interest rate increases/adjusting minimum payments More closely monitor risk score volatility Closely monitor cash advances on credit cards and utilization ratesManual credit reviewConsumer incentives to close accountsEarly-out programs and outsourcingEncouraging automatic withdrawal options for credit cardsMany traditional cure programs include dynamic incentives for liquidation beyond arrears for curing the account


Lender Strategies – Concessions

Increased collections pressure/competition provided multicreditor defaults Credit issuers, to curb losses and avoid bankruptcy, have adopted policies that assist borrowers with burden of paying their debtConcession policies:

Renegotiating credit terms and payment termsCustomers with solid credit card payment history will not pay any penalties if payment is immediately madeRestructuring loans to reduce interest rates, suspending future late fees and extending repayment terms through a variety of payment programsMore aggressive settlement parameters

Model customer responses to delinquency-instigated repricingMany issuers are recommending early stage delinquent customers to first contact a qualified credit counseling agencyFlexibility during difficult times can build customer loyalty


Lender Strategies – Pre-Emptive

Strategy for collections is increasingly focused on a borrower’s current financial position rather than age of debt Pre-emptive collections – accelerate customer contact with at-risk customers before they reach their highest stress point

Identify changes in behaviour that may indicate a change in a customer's risk profile Segment "at risk" customers that should receive active interventionWhile customers may question why actions are being taken on a current account, a properly executed program can actually turn effected customers into loyal customersTest strategies should be introduced as challengers in a controlled manner, to minimize potential negative customer impactHiring the right people and providing the right training is a critical success factor for pre-emptive collection programs


Credit Card Regulation - US


Placing unfair time constraints on paymentsUnfairly allocating payments among balances with different interest ratesUnfairly raising annual percentage rates on outstanding balancesPlacing too-high fees for exceeding the credit limit solely because of a holdUnfairly computing balances Unfairly adding security deposits and feesMaking deceptive offers of credit

Analyst – Oppenheimer & Co. – stifle consumer spending because it will reduce the current economics of the credit card industry to a level in which lenders will ultimately elect to provide fewer credit lines to fewer customers

Increasing call for regulation – curb “unfair lending practices”US – Federal Reserve Board (in effect July 2010)

Summary


With the recession, governments around the world are taking unprecedented actions to stimulate a recovery by increasing liquidity, interest rate reductions, and capital spendingLenders that can assist their customers through difficult times will most likely gain loyal customers; while those that continue to follow the traditional collections methods and tactics may struggle Traditional forecasting models based on historical patterns are proving unreliable predictors of future risk – important to review methods, techniques and models and scenario testingThe collections environment continues to be challenging, but by being proactive and looking beyond traditional collections treatment practices, lenders will find themselves ahead in a customer's payment hierarchy during difficult times

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SCORE Statistical Consulting Inc. CAGT - Credit and Collections Richard Yap