What Our Commercial Banking Risk Research Found

During the many conversations we've had with commercial bankers during the pandemic, it quickly became clearly that banks were starting to focus a great deal on risk levels and risk mitigation.

All the "what are you seeing?" questions we were getting, prompted us to do a deep dive into the PrecisionLender pricing database for answers. The result was our recent webinar and white paper, both titled “Risk Levels and Bank Behaviors During COVID-19.”

In this episode of the Purposeful Banker, we get a preview from Gita Thollesson, the report's author, about what she found. 



Helpful Links

Risk Levels & Bank Behavior During COVID-19 (Report)

Commercial Risk Levels And Bank Behavior During COVID-19 (Webinar Replay)

COVID-19 Market Updates & Resources (PrecisionLender)

Questions? Comments? Email Jim Young at jyoung@precisionlender.com


Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender. Where we discuss big topics in the minds of today's best bankers. I'm your host, Jim Young, director of content at PrecisionLender. And I'm joined today by Gita Tholleson, our senior solution strategist for our parent company, Q2. And those of you who are regular listeners to The Purposeful Banker know that Gita is the person we turn to when we want to take a deep dive into the data and find out what it tells us about how commercial banks are performing and the tactics they're employing.
And that's what we did early in the second quarter when the industry was really starting to feel the impact of the COVID-19 pandemic, and banks were starting to focus a great deal on risk levels and risk mitigation. So we asked Gita to take a look at the PrecisionLender pricing database, and try to give a sense for how things were looking in the area of risk. And that led to her recent webinar in white paper, risk levels and bank behaviors during COVID-19, and we'll have links to both of those in the show notes.
But for this podcast, we're going to treat it as a little bit of a teaser for you. And it was some of the highlights of what Gita found. So Gita, first, thanks for coming back on the podcast.
Gita Tholleson: My pleasure, Jim.
Jim Young: So you talk to a lot of commercial bankers on a regular basis.
Gita Tholleson: Yeah.
Jim Young: When did you notice that the subject of risk had really... It's always one of the topics, but when did you notice that it had become the topic for what bankers wanted to talk about?
Gita Tholleson: Well Jim, it actually wasn't such a gradual shift, didn't happen pretty much overnight when the pandemic hit in mid-March. So, it really was very sudden. There was this sea change in the market and we started getting flooded with calls, people just trying to wrap their arms around what was happening and what was yet to come. So I'd say probably mid-March was when we started to hear a lot of talk about risk.
Jim Young: And what were some and maybe the specific questions that they were asking you? I know for example, floors was one that came up a lot in terms of pricing tactics, but what were some of the other specific questions?
Gita Tholleson: Yeah, that's absolutely right. So it was less about what we were seeing in terms of borrower, credit quality, more about what banks were doing. So how banks were reacting. And I think for a lot of folks, they were really coming from a starting point of really having no other frame of reference to what was going on than what they had seen during the last downturn 12 years ago.
So the initial questions that we got in March were reminiscent of what we saw at that time. We're just trying to understand how banks were reacting to the pandemic, were they implementing rate flows, as you said, were they widening spreads, tightening structure or pulling back on lending. So really just trying to understand how banks were reacting. Because it was almost taken as a given that risk would be through the roof. So the questions were more about, what are banks doing in response to this.
Jim Young: Okay. So, that was sort of the genesis of this report. So let's move on to that. And for those who perhaps aren't familiar with the research reports you've done over the last couple of years, can you talk a little bit about your methodology and your data sources?
Gita Tholleson: Yeah, absolutely. So we do a limited amount of analysis based on Fed data and that's really just the level set, but that data is at a bit of a lag. So we actually focus most of our analysis on our own proprietary data, which reflects actual book loans and deposits from over 150 commercial banks. And that data gives us a much earlier indication of potential credit problems. And then we don't even have to wait for a loan to be charged off or even to be moved to delinquent status.
We can identify performing loans that have migrated south. And we can also look at trends in usage patterns, trends in deposit balances. And those were things that are even earlier indicators than even bank risk ratings. So it gives us a much earlier read on what's happening in terms of credit quality. But then we can also look at things like, how are banks responding in terms of structure, what are they doing around perhaps rightsizing or collateral. And so using our proprietary data, we can see that very, very quickly in deals that have just closed and even in deals that are in the pipeline that haven't yet closed, you can see what people are working on right now.
Jim Young: So you kind of started to get into this a little bit, but I'm wondering if you could just lay out the main areas you wanted to focus on in this piece. It's obviously a very big topic. So how did you decide to structure the report?
Gita Tholleson: Yeah, so we wanted to look at a couple of things, primarily we wanted to look at how the market had been impacted. And clearly the economic impacts would have a direct impact on borrower credit quality. But more importantly, how is the commercial banking market being impacted by the pandemic and then how have banks responded. So what are they doing differently now, in response to what's happening out there? And then we wanted to end... We didn't want this to all be about gloom and doom.
And so we wanted to try to think through some ways that banks could better mitigate the risks that they're facing and really try to get out ahead of this issue and then actually do better. Make the best out of a bad situation.
Jim Young: And again we don't want to give away the whole story on this podcast. We'd like for you to download that report. And if you want to check out the replay of the webinar, and again, those links will be in our show notes. But just for our listeners here, Gita, maybe a few teasers and maybe start off with, is there one thing you found in the report that surprised you? You had this expectation, what you thought the data would tell you and the data told you something different?
Gita Tholleson: Yeah, so I'd say probably the biggest surprise for me was that downgrades weren't quite as bad as what I think folks were anticipating. We had done a survey back at the start of the COVID pandemic, and I guess it was probably in early April. And at that time it was an overwhelming majority of bankers that were expecting to downgrade some portion of their portfolio. But I think it was something like 60% were thinking the downgrades would be worse than 10%. And some thought they'd even be much, much higher.
In the end, the figures came out a little South of 20%, but that said, that was only one quarter. And so we'll see what happens going forward for the rest of the year. But I was surprised that it wasn't more extreme. And probably the other thing that surprised me a bit was to see that banks were not being more proactive in responding to some of the early warning signals that even we can see from the data. Things like spikes in usage or deposit balance is being depleted, we really weren't seeing changes in risk ratings.
It's still business as usual. People are re-evaluating risk ratings at the time of renewal or upon their annual review. But we're not seeing some of those early warning signals being looked at so consistently across the market. So it may just be that banks haven't recognized some of the downgrades that are out there, as opposed to them just not experiencing them. So, but that was a little bit of a surprise as well.
Jim Young: So not doing as many of the downgrades, I guess you would say in general it is better than expected or a better news than you expect. Was there something else when you looked at it that was, wow, that's a little bit more concerning than you had anticipated?
Gita Tholleson: Well, no. The overall signals around other metrics, things like usage rates at the very beginning of the pandemic, we saw usage rates spike. And that was a big concern because it looked like that was assigned, the customers were really struggling. We had seen at one point deposits being depleted. Those signals have actually gone in the other direction.
Now, part of that may just be that there's been this injection of liquidity from the Fed, there's some of that going on, some of it is also that a lot of companies, especially smaller companies have sort of pause operations. They're sitting on a lot of cash because they're not really open for business. And so some of it is that as well. So that was probably if anything better than expected.
And then the other thing I'd say that was maybe a little more extreme than I had anticipated was just the extent to which banks are pulling back on credit. Because when you talk to bankers, they're all talking about how they're supporting customers, they're talking about for Barron's, despite what the credit folks say, at least the surveys about tightening. Listening to bankers you wouldn't think that there would be that much tightening, but there actually was quite a bit especially smaller companies, where there was a lot of right-sizing going on. So definitely we're seeing in the data that banks are being very conservative as they probably should be.
Jim Young: Got you. One thing, last year, I guess, is a little over a year ago, you did research into a very specific part of risk pricing with renewals. And so this was one area that you could do a little bit of a year over year comparison, not quite exact, but I'm curious what you found when comparing what's going on right now with renewals to how renewals were priced last year.
Gita Tholleson: Yeah. There's definitely been a change there. We're seeing a lot more repricing now than we saw a year ago. Certainly on downgrades, we're seeing more repricing. Last time when we looked at this, it was something like only 10% of downgraded credits had an upward repricing, but now that's closer to about a third, so that's much, much higher than we're even seeing cases where there was either an upgrade or no change in risk rating.
And some percentage of those deals were also getting repriced upward. So definitely more proactive, still not to the level that we had seen back during the Great Recession, where there was much more consistent in terms of banks repricing credit. So still a long way to go, but absolutely some strides being made compared to the last renewal season.
Jim Young: Yeah. I seem to remember last year there were actually a fair number of cases in which the credit had deteriorated and yet the price upon renewal actually dropped.
Gita Tholleson: That's right. Bank's trying to... The customer advocate being there for them and doing what they had to help them through the tough time. Absolutely.
Jim Young: Yeah. So finally, you mentioned earlier, you came up with a list and this is one of the features of your reports where you take people through the data, and then you say, "Hey, and these are some of the things we think you can do better, or get better results in these particular areas." So I'm wondering if you can share with us maybe one or two of those tactics that you would suggest for banks that are really wanting to focus on risk mitigation.
Gita Tholleson: Sure. So yeah, there are several. I'd say probably one of the more important tactics is to pay attention to those early warning signals. So what we like to call anomaly detection, so really get out ahead of those opportunities, be proactive in looking for those signals, don't wait for your annual review or for your renewal event to start looking at credit risk, but get warned when something happens, whether it's an unexpected rise in usage or all of a sudden the deposits it kind of dwindle and alert your bankers right away when those signals pop up.
Related to that is I'd say to get out ahead of those renewal opportunities. So really trying to be proactive in both identifying changes in credit quality, but then also identifying those changes in the market and develop a strategy early on for having those conversations with your borrowers, if you've got a renewal coming due. And there are others that we cover in the white paper.
Jim Young: Absolutely. And again, you can access that report. We'll have the link to the landing page for the reports and as well as the link to the replay of this webinar. But Gita, thanks again for coming on.
Gita Tholleson: My pleasure, Jim.
Jim Young: And again, we'll have those links in the show notes. And again, thanks so much for listening. And for a few friendly reminders, if you want to listen to more podcasts, check out more of our content, and including Gita's past research reports, you can visit the resourcepage@precisionlender.com or head over to our homepage to learn more about the company behind the content.
If you like what you've been hearing, please make sure to subscribe to the feed and Apple Podcasts, Google Play or Stitcher. Love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young, Gita Tholleson and you've been listening to the Purposeful Bank.

About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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