Credit (part III - credit assessment)

Q: Is borrower good or bad?
A: Is he capable to survive lending period. With how big probability of default?

Q: Techniques?
A: External by credit agencies or FICO scores and internal by lenders (corporate or retail). Corporates are using Altman's Z-score, Merton's default model for listed companies ...., retail is using Linear discriminant analysis and Non-linear PD regression

Q: Credit rating agencies?
A:
GLOBAL
Moody's www.moodys.com, Standard&Poor's www2.standardandpors.com, Fitch www.fitchratings.com
disadvantage on local markets, like China, as they are not allowed to see all the data by China government

SPECIAL
A.M. Best www.ambest.com, Dagong Global Credit Rating dagongcredit.com/dagongweb/english/index.php

Q: Rating scores?
A: AAA, AA, A, BBB, BB, B, CCC, CC, C (from best to worst), probability of default within 1 year / 3 years AAA-0.0033% / 0.1% , AA-0.033% / 0.25% , A-0.0834% / 0.25% , BBB-0.3345% / 1.00% , BB-2.5652% / 7.5% , B-7.1682% / 20% , CCC-15.8567% / 40% , CC-29.5270% / 65% , C-63.1597% / 95%

Q: AAA corporates
A: only 4 in the world, Johnson & Johnson, Exxon Mobil, Microsoft, Automatic Data Processing

Q: FICO scores
A: TransUnion, Equifax, Experian, Dun & Bredstreet,
it is a combination of
a) payment history (35%) - delayed payments, lawsuit, bankruptcy, court orders,
b) credit utilization = outstanding debt / total credit limit (30%),
c) credit history (15%) - age of the oldest loan and average age of all loan accounts
d) credit experience (10%) - history in credit
e) recent inquiry (10%) - huge amount of loan application

Super prime ...... 740 - 850, Prime .... 680 - 739, Alt-A ..... 620 - 679, Subrpime .... 550 - 619, Deep subprime ..... 350 - 549

Q: FICO vs default in one year
A: 800 - 850 .... 1%, 750 - 799 .... 2%, 5%, 14%, 31%, 51%, 70%, 83% for 350 - 499

PD = Normsdist(-0.009FICO+0.0508)

it is possible to check your FICO data on internet (http://www.fico.com/en/Products/Scoring/Pages/default.aspx)

CREDIT (part II)

The basic definitions:
default ..... debt overdue of 90 days
default risk ..... the risk of loss of the lender due the default of borrower

Typical credit card ..... limit 50.000 HKD, 16-20% p.a.

Typical mortgage ..... 2.100.000 HKD, 20 years, interest rate 3%, 11.647 HKD per month down payment

Hong Kong intrabank rate .....
http://www.hkma.gov.hk/eng/market-data-and-statistics/economic-and-financial-data-for-hong-kong.shtml

CREDIT (part I)

To know the rating approach of banks/rating agencies is crucially important for all the companies trying to approach banks with good projects, with a projects with higher probability of acceptance.

As we may know Hong Kong is for a long time a financial center of Greater China (Taiwan, China, Hong Kong). For all the foreign companies operating in the region it is, in many cases, the best location for the financial, cash flow and legal services. We shall do business within mainland or Taiwan, but we would always suffer by the local approach as long, as we just do sell, produce or purchase within countries, but let all cash flow, financing or legal aid to be happening in HK.

This rating matrix shows the relationship between rating of the country and the probability of default. We may also observe a small example of the countries following the recent Standard & Poor's rating model. The probability of default was derived from BASEL III ECAI Plus.

In other words we may say, that the risk of default of Finland is 10.1 smaller, than China's one and 25x smaller than Malaysian one. The risk of default of Cyprus is 15,6567%.

We may also see, that a risk of Taiwan, China and Hong Kong is different. China's risk is 0,0333 on the way up to 0,0834% with stable outlook, Taiwan's risk is the same. Hong Kong risk is 10.1 times smaller with stable outlook. This is important fact to consider.

For current data on rating please follow Wikipedia - List of countries by credit rating