Seoul National Bank: The Chief Credit Officers’ Tough Decisions The Case Solution
According to the chosen wait and see strategy chosen above, 75% of the total recovery will be collected by the bank in case, the borrower defaults on the loan. The financial calculations show that the bank would be able to collect a total amount of $ 684,010,332.37, in case the borrower defaults. Conclusively, the loan has a minimum financial and business risks as the probability of default is low at 25 and industry within which the borrower operates also has a medium risk.
In addition, solver has been used to come with an optimal collection strategy. The objective function was to maximize the collection from the loan by changing the default probability and percentage of collection. The solver analysis resulted in a maximum recovery of $688,695,334.65by changing the constraints. The optimal collection percentage in the solver analysis was 75%, which is related to the wait and see collection strategy. So, the solver analysis also concluded the wait and see strategy as an optimal collection strategy.
Part 6
Allocation of $70 million portfolio requires the utmost attention towards the risks and returns of loans, granted tod different borrowers. There is a policy implemented by the Seoul National Bank that the borrower would not be granted further borrowing in case of default because such action would reduce the overall creditworthiness and it would create more liabilities in the borrower’s statement of financial position. Designing a portfolio has become a challenging task in face of the changing market conditions and in face of the tough competition.
Chang had to come with the optimal portfolio which maximizes the bank’s return thereby minimizing the losses as result of the default over the loan by the borrowers. It requires the utmost attention towards the current market condition to come up with the best or an optimal portfolio for the bank. However, in case of Seoul National Bank the portfolio does not require a continuous improvement as it is based upon a period of one year. The portfolio is analysed to generate a lower return for the bank as it involves a lower risk. According to Chang, the default rate on a loan must not exceed 10%. In order to identify such loan; the IF formula is used in Excel, which shows that there are total of 103 loans among 168 loan requests, which have a default probability less than 10%. In addition, these 103 request are placed in accordance with Chang’s other guidelines so that the loan amount must not exceed the requested loan amount and the default rate must be lower than 10% etc.
The amount of $70 million portfolio is equally allocated among all the loan requests because of low risk associated with the loan requests. By following a wait and see strategy, the bank would be able to collect a higher amount of recovery by making such portfolio allocation. In addition, the rating and financial risk of each loan request is identified using the VLOOKUP formula in excel. The low financial risk implies that the return generated by a loan request would be low. (See Excel Sheet 5). In addition, the default rating shows that risk faced by the bank over the portfolio would be less, as suggested by the low to medium default probabilities. If any company defaults on the loan and shows unwillingness to make the payment then the bank should use the wait and see strategy, which would ultimately increase the bank recovery amount more as compared to the increase through other strategies.......................
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