Endorsed Partner ADVICE TO BANK LEADERS: DON’T BE REACTIVE ON CREDIT QUALITY BANKS HAVE FOUR KEY REASONS TO BE MORE VIGILANT IN 2022 AND THE NEXT COUPLE OF YEARS With credit quality metrics at generationally stellar levels, concern about credit risk in 2022 may seem unwarranted, making any deployed defensive strategies appear premature. For decades, banking has evolved into an orientation that takes most of its risk management cues from external stakeholders, including investors, trusted vendors, market conditions – and regulators in particular. Undoubtedly, becoming defensive prematurely can add challenges for management teams at a time when loan growth is still a main strategic objective. But waiting until credit metrics pivot is sure to add risk and potential pain. Banks have four key reasons to be more vigilant in 2022 and the next couple of years. These, and the suggested steps prudent management teams should take in their wake, are below. 1. The COVID-19 sugar high has turned sour. All of the government largesse and regulatory respites in response to COVID-19 helped unleash 40-year-high inflation levels. In response, the Federal Reserve has begun ramping up interest rates at potential intervals not experienced in decades. These factors are proven to precede higher credit stress. Continuing supply chain disruptions further contribute and strengthen the insidious inflation psychology that weighs on the economy. Recommendation: Bankers must be more proactive in identifying borrowers who are particularly vulnerable to growing marketplace pressures by using portfolio analytics to identify credit hotspots, increased stress testing and more robust loan reviews. 2. Post-booking credit servicing is struggling across the industry. From IntelliCredit’s perspective, garnered through conducting current loan reviews and merger and acquisition due diligence, the post-booking credit servicing area is where most portfolio management deficiencies occur. Reasons include borrowers who lag behind in providing current financials or – even worse – banks experiencing depletions in the credit administration staff that normally performs annual reviews. These talent shortages reflect broader recruitment and retention challenges, and are exacerbated by growing salary inflation. Recommendation: A new storefront concept may be emerging in community banking. Customer-facing services and products are handled by the bank, and backshop operational and risk assessment responsibilities are supported in a co-opt style by correspondent banking groups or vendors specifically equipped to deliver this type of administrative support. 3. Chasing needed loan growth during a credit cycle shift is risky. Coming out of the pandemic, community banks have lagged behind larger institutions with regards to robust organic loan growth, net of Paycheck Protection Program loans. Even at the Bank Director 2022 Acquire or Be Acquired Conference, investment bankers reminded commercial bankers of the critical link between sustainable loan growth and their profitability and valuation models. However, the riskmanagement axiom of “Loans made late in a benign credit cbak.com 14 In Touch
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