The Impact of COVID-19 on Credit Analysis

It seems like the phrase “The new normal” has become the new normal over the last several months. Many aspects of our lives have been impacted by COVID-19, so I’d like to take a look at how it has impacted credit analysis. Has your institution been experiencing a “new normal” and changed processes and policies to deal with uncertainty in today’s economic environment?

As we look to the day that the storms pass, it’s important to realize how we analyze and manage risk in commercial and small business lending will change. If you were in the industry through the financial crisis in 2007-2008, you’ll remember that there were several changes in small business lending including the rise of alternative lending and crowdfunding – both of which have continued to grow in the last decade. The reality is that there will likely be several lasting impacts of COVID-19 on credit.

Losses Will Be Different by Sector and Subsector

Every sector has been impacted and is recovering differently after the initial shock from COVID-19 so as bankers, we need to adapt accordingly. Have you built out predictions on the different sectors in your portfolio? What is your plan for updating your credit policy? Analyzing credit risk appropriately means understanding your borrower as well as their business. Every business is unique and to make the best credit decisions, it’s important to understand their business needs.

Evaluating the Reliability of Data

We also must re-evaluate our data sources for making credit decisions since many credit indicators have become unreliable. Many data models that banks and credit unions have been using are pulling data from the last decade which doesn’t reflect the current economic environment. Change has been constant throughout 2020, rendering many of our traditional data sources obsolete quickly.

Borrowers Are Migrating to Digital Channels

With shortened branch hours and social distancing measures limiting in-person interactions, many customers have adopted digital channels for communication. Banks and credit unions that have a portal to securely collect documentation and communicate with clients have an instant leg up over their competitors. Many borrowers were already adopting digital channels before the pandemic so it’s likely that this expectation will continue to grow after the dust settles from the COVID-19 pandemic – becoming table stakes for delivering on customer expectations.

Even though the only constant is change, it’s important as bankers to understand how change is impacting your business. Credit analysis isn’t the same as it was at the beginning of 2020 – things that have historically happened gradually, allowing us to spot trends have started to happen overnight. How we respond to the new pace will likely be a lasting impact of COVID-19.

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Here's a video interview with Stephanie Butler and CUbroadcast discussing COVID-19's affect on analyzing credit risk.

Author Bio

As Director of Advisory Services, Stephanie Butler guides the implementation and strategic consulting for new and existing Baker Hill clients. Butler coordinates the Business Process Consultant team and is responsible for analyzing client goals and objectives and providing recommendations for best practices. Relying on more than 25 years of experience within the financial services industry, she successfully maintains a client base of banks and credit unions ranging from $100 million to $100 billion in asset size.

Butler earned her bachelor’s degree in Accounting from Davenport University and received her master’s degree in Management from Aquinas College.