Moody s CreditCycle TM Benefits & Case Studies Existing vintages under alternative scenarios AUTO BANKCARD CONSUMER FINANCE FIRST MORTGAGE HOME EQUITY STUDENT LOAN AND MORE Future vintages under alternative scenarios A DYNAMIC APPROACH FOR FORECASTING AND STRESS TESTING CONSUMER CREDIT PORTFOLIOS
Moody s CreditCycle TM is a consumer credit management service that helps portfolio and risk managers, investors, and analysts better manage their exposures to underlying credit and economic cycles. Moody s Analytics solution is customized to fit your specific requirements and unique portfolio characteristics, enabling you to: Quickly and easily generate forecasts and stress tests for virtually any aspect of a consumer credit portfolio, including delinquency and default rates, origination volumes, utilization rates, collection/recovery rates, and late-fee revenues. Moody s CreditCycle allows you to forecast not only the performance of existing vintages of loans, but also the performance of future loans. This is particularly important because your risk can be controlled most effectively by managing the loans being written today. Identify and understand the drivers of your consumer credit portfolio, whether they are internal (such as lending criteria) or external (such as macroeconomic or credit cycle fluctuations). Through a highly collaborative and open process, we will work with you to analyze the singular characteristics of your clientele, lending standards, business practices and market footprint. By combining the quality and richness of Moody s Analytics macroeconomic and regional forecasting expertise with cutting-edge credit models, Moody s CreditCycle offers a unique advantage. Analyze the effects of life-cycle component, origination condition, and economic events on the performance of your portfolio to help answer key questions: How much of today s losses on 2005 loans are due to our underwriting standards at the time, and how much can be explained by economic conditions? We ve just observed a spike in losses in loans generated a year ago. How much of this jump is due to current credit conditions versus the underlying life cycle of last year s cohort? How will future losses be affected if our response to the current turmoil is to tighten standards by X in region A versus region B? How should our response change if the economy deteriorates even more than we expect? Run alternative scenario forecasts to see how different assumptions about economic conditions or your lending standards or business strategy will affect the future performance of the portfolio. For economic conditions, you can choose from Moody s Analytics standard alternative forecasts or specify your own scenarios, making it easy to recalculate loss forecasts under a range of economic conditions. Leverage a dedicated team of experts to ensure you always have the support needed to accurately interpret results and answer questions. Our unique consultative approach means that you will have ongoing access to the economists who develop and support your customized solution. Our Credit Analytics team, which is responsible for developing the core methodology integrated into Moody s CreditCycle, comprises a dedicated staff of econometricians and credit analysts and is backed by more than 70 full-time economists who produce Moody s Analytics macro and regional forecasts and analyses. Your Internal Data/Actions (Historical performance data, business strategy, marketing efforts, credit policies, collections practices, etc.) Economic Environment (Subnational economic conditions, employment, interest rates, demographics, etc; from Moody's Analytics or your own sources) Moody s CreditCycle TWO PHASED APPROACH: 1. Identify Drivers & Customize Models 2. Forecast/Stress Test Performance Future Vintages Existing Vintages Vintages 0.04-0.05 0.03-0.04 0.02-0.03 0.01-0.02 0.00-0.01 60 PLUS DAY DELINQUENCY RATE, BASELINE ORIGINATION TIME: 2007 2008 2009 2010 2011 2012 Historical Performance Forecasted Performance 2013 2014 MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 1
Benefits We have found that users of Moody s CreditCycle achieve a variety of benefits. Some of them are directly measurable; others represent longer-term qualitative benefits. INCREASED FORECASTING ACCURACY You can achieve higher forecast accuracy and improve confidence in projections, enabling you to make better business decisions, optimal capital allocation, underwriting policy, budgeting, and resource allocation. Economic forecasts and scenarios are updated in real time and integrated seamlessly with the custom models developed specifically for your portfolio. This means that the unique nature of your business, policies and markets are reflected, and your portfolio forecasts will always draw on fresh economic data. Moody s CreditCycle allows us to be more precise in forecasting losses. This has major implications for ROI. -Regional Bank IMPROVED VISIBILITY ON VINTAGE QUALITY You will heighten your ability to anticipate and differentiate good versus bad performers in a portfolio, which is critical for collection and risk-mitigation policies. Our solution helps risk managers quantify the wave of future delinquent accounts and identify those within different segments, regions or vintages. Users of these techniques have taken early account-management actions to prevent hikes in delinquency and default rates. The level of transparency provided through Moody s CreditCycle, in terms of performance drivers and visibility into model is exceptional. -Regional Bank User QUANTIFY FUTURE VINTAGE QUALITY You can take defensive or aggressive action with confidence by having a relative measure of quality for future vintages, based on assumptions for economic conditions and lending standards. This will enable you to monitor progress very closely, raising the odds of reducing risk while increasing rewards. Moody s CreditCycle s ability to assess the quality of future vintages is particularly helpful. -Bank TRANSPARENT METHODOLOGY You and your regulators can have access to model specifications and will be able to fully understand how forecasts are generated, because our open methodology is not a black box approach. The modeling methodology used in Moody s CreditCycle has been successfully applied for years, is fully documented has been proven to be useful to a broad range of managers and regulators. Moody s CreditCycle facilitates complete transparency of our process allowing for more direct and open dialogue with regulators. (Basel II etc.) -Regional Bank MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 2
Benefits COMPLETE AND MANAGEABLE APPROACH You get a model that is representative of actual economic dynamics of consumer lending by directly linking performance with realworld drivers such as economic conditions (employment, housing, interest rates, etc.), industry dynamics, and lending standards. Moody s CreditCycle makes administration manageable, so you have significant flexibility and freedom in assessing what-if scenarios, running stress tests, and, in general, considering a wider array of business strategies that would have required substantially more effort with other tools and with likely lower-quality results. This ultimately facilitates more direct and specific discussions among teams and management allowing your organization to confidently articulate what drives certain portfolio components. Moody s CreditCycle helps me explicitly link economics into our forecasting model resulting in increased accuracy. -Auto Lender ACCESS TO EXPERTS Your team can leverage a network of more than 70 regional economists and credit modelers on a broad range of topics that impact consumer credit. Our staff is entirely focused on regional economic conditions and how they affect consumers. Some users find the interaction with our large team of experts invaluable in thinking about portfolio segmentation, variable selection, model specification, expected economic conditions/drivers for a certain country or region, etc. The experience of working with you in the past few months was amazing both on a professional and personal level. You were always accessible, provided service in the highest quality, and helped us above and beyond my expectations. -Bank INCREASED PRODUCTIVITY AND EFFICIENCY Your analysts can focus on what really matters because a unified platform that hosts the data and drivers, economic data, and models will reduce the burden on their time. For example, the process for generating a forecast under an extreme economic scenario can be managed within hours by using Moody s CreditCycle, rather than the few weeks it takes for some institutions to perform. The ease of including economics using Moody s CreditCycle saves us a lot of time and allows us to answer more questions quicker -Bank 2008M10 Total delinquency rate (% of orig. $) under different economic scenarios 7.00 6.50 6.00 5.50 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2008M12 2009M2 2009M4 2009M6 2009M8 2009M10 2009M12 2010M2 2010M4 2010M6 2010M8 2010M10 2010M12 - Baseline Scenario - S4: Very Pessimistic Scenario 2011M2 2011M4 2011M6 2011M8 2011M12 Macroeconomics of Credit Risk: Econometrics behind Moody s CreditCycle MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 3
Case Studies AUTO LENDER The forecasting and risk management teams of this very large auto lender saw that their forecasts were not performing well during the start of the economic downturn. They intuitively understood that the deteriorating economy was impacting their borrowers, but because their modeling approach didn t contain any significant economic drivers, their models were not predictive. Therefore, business planning, risk management and discussions with stakeholders were not optimal. Members of the loss-forecasting and stress-testing group indicated that they work in a very demanding environment: Management wants transparency on how variables get in and what their impact is. They want to be confident that marginal changes are producing better results. From a top-down perspective, they want to understand the assumptions the business is both explicitly and implicitly dependent on. The team needs to respond to management requests quickly and convincingly, in detail. The number of requests has significantly increased, and the team can no longer afford to take weeks to respond. The auto lender explored outside options and ultimately chose Moody s CreditCycle precisely because it is a comprehensive way of capturing all portfolio drivers, be they external such as the economy or internal such as lending standards or dealer behavior. The lender was fully focused on getting accurate forecasts in order to optimize its dual mandate of facilitating auto sales (being part of a large auto manufacturer) while managing profitability for the group. The combination of regional economic expertise and a comprehensive and understandable modeling platform offered by Moody s CreditCycle won over management. Now, they are using Moody s CreditCycle to run its lending business, forecast loan performance, perform stress testing, and, in finance, to set reserves for loss allowance. According to feedback from users, Forecast accuracy has held up very well and has allowed us to be ahead of time. Second, reduction in uncertainty has been a big component of value, as we now feel more confident with forecasts we present to the broader team and decisions it helps us make. Lastly, Moody s CreditCycle is allowing us to spend less time on lower-value-added activities around data and model management and more time on business analysis that lets us move the business forward. Reduction in uncertainty has been a big component of value, as we now feel more confident with forecasts we present to the broader team and decisions it helps us make. Lastly, Moody s CreditCycle is allowing us to spend less time on lower-value-added activities around data and model management and more time on business analysis that lets us move the business forward. -Auto Lender R INCREASED FORECAST ACCURACY R INCREASED PRODUCTIVITY & EFFICIENCY R INTEGRATED ECONOMICS R TRANSPARENT METHODOLOGY R ACCESS TO EXPERTS This auto lender is now exploring expanded usage at more granular geographic levels to make it more actionable on a regular basis. MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 4
Case Studies GLOBAL CREDIT CARD ISSUER This credit card lender is using Moody s CreditCycle to help identify how its credit card portfolio correlates with the underlying economic and credit cycle what the drivers of performance are, how they interact, how they differ by segment, geography and time, etc. Additionally, the lender is using Moody s CreditCycle to forecast delinquency rates under various economic scenarios for what-if analysis and stress testing. This lender was using a forecasting tool from another provider, but was unhappy with the results, because they lacked a transparent linkage with macroeconomic drivers. The chief risk officer, who was familiar with Moody s Analytics economic forecasting and, in particular, our alternative scenarios, wanted to better understand how we linked this to retail credit modeling. They selected Moody s Analytics because of the transparency of our methodology, modeling expertise in this area, and accessibility of our team of economists and modelers. Our due diligence process and sound macroeconomic foundations differentiated the Moody s Analytics offering from alternatives. The client was so impressed with the modeling service that it shared the results with senior management. Results are being used to assist with collections, portfolio risk management, and stress-testing efforts. This lender is exploring ways to expand usage of Moody s CreditCycle beyond the credit cards and into mortgages. Moody s Credit Cycle results were very useful, and we presented to senior management to facilitate business planning. -Bank R INTEGRATED ECONOMICS R STRESS TESTING & SCENARIO ANALYSIS R TRANSPARENT METHODOLOGY R ACCESS TO EXPERTS MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 5
Case Studies BANK The partnership group of this large issuer provides credit card lending capabilities to a wide variety of retailers for their consumers. The lender uses Moody s CreditCycle for strategic applications/planning and for regulatory stress-testing requirements. With a diverse portfolio, it was looking for a robust, transparent and manageable platform for forecasting and stress testing, and Moody s CreditCycle was the clear choice. The company s risk management group was looking for a solution to help manage portfolios and capital reserves; perform regulatory stress testing; and conduct strategic planning and resource allocation. We introduced Moody s CreditCycle and our alternative scenarios for stress testing, which garnered the group s interest. During the evaluation, the risk management team weighed options from external providers as well as an internal team. The group chose Moody s CreditCycle, because it was impressed with ability to combine economic and internal policy simultaneously to measure impacts quickly and with more detail and transparency. In addition, our effectiveness in forecasting future vintages was a key differentiating factor. The ability to deliver solutions quickly also contributed to the selection. Our solution was underscored by the chief financial officer of the partnership group, who stated, I needed to know what resources to employ and where to increase my bottom line, and Moody s CreditCycle provided that strategic capability. I needed to know what resources to employ and where to increase my bottom line, and Moody s CreditCycle provided that strategic capability. -Bank R INCREASED FORECAST ACCURACY R TRANSPARENT METHODOLOGY R COMPLETE & MANAGEABLE APPROACH R INTEGRATED ECONOMICS R QUANTIFY FUTURE VINTAGE QUALITY R STRESS TESTING & SCENARIO ANALYSIS This large U.S. lender is exploring ways to expand usage of Moody s CreditCycle into its own credit card lending business as well as other lines such as mortgages and auto lending. MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 6
Case Studies REGIONAL BANK This large regional bank was looking to more confidently answer questions such as: What would my losses be if I changed my loan-to-value cutoff? or How bad would my losses be if the economy were to go into a deeper recession? The bank uses Moody s CreditCycle across its full spectrum of products (credit cards, mortgages, auto loans) as a loss-forecasting solution that provides a higher level of accuracy and is less resource-intensive than other methods it has explored. The fact that our product substantially facilitates execution of government-mandated stress tests was also a significant benefit. A user recently explained: The level of transparency provided through Moody s CreditCycle in terms of performance drivers and visibility into models is exceptional. Moody s CreditCycle is very helpful for compliance and regulator needs, given consistency, transparency, documentation, and sensible alternative scenarios. This, combined with increased forecast accuracy and the speed with which analysis can be run, makes Moody s CreditCycle a key component of the bank s business management process. The bank uses Moody s CreditCycle for capital planning and, given regulatory scrutiny, to be able to quickly consider what could happen in a double-dip scenario. Having drivers such as economic assumptions come from an independent provider helped facilitate discussions with regulators, because certain forecasting biases are avoided since driver (housing activity, employment, commodity prices) forecasting is independent from credit forecasting. Full integration of economic data to originating/ publishing sources makes adjusting to new data very easy. The availability of standard alternative scenarios allows team members to focus on their core work. The level of transparency provided through Moody s CreditCycle in terms of performance drivers and visibility into models is exceptional. Moody s CreditCycle is very helpful for compliance and regulator needs, given consistency, transparency, documentation, and sensible alternative scenarios. -Regional Bank R INCREASED FORECAST ACCURACY R INCREASED PRODUCTIVITY & EFFICIENCY R INTEGRATED ECONOMICS R TRANSPARENT METHODOLOGY R STRESS TESTING & SCENARIO ANALYSIS Currently the bank is exploring broadening usage of Moody s CreditCycle into additional functions and lines of businesses as well as in assessment of acquisition opportunities. MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 7
Case Studies CREDIT CARD ISSUER The banking division of a large insurance firm was looking for a comprehensive risk management solution to more effectively track its credit card portfolio, which was at times not performing as expected. It explored a variety of commercially available options and chose Moody s CreditCycle because it was impressed with its ability to identify trends based on lending standards and economic conditions at the time of origination and more accurately capture broad industry trends and correlation. This allows the lender to analyze and modify its lending standards more pro actively, as it can granularly zero in on groups of loans that need attention while not spending resources and capital on groups of loans that are performing. The executive team was also pleased with our transparent methodology, customizable modeling approach, alternative scenarios, and ability to account for a variety of drivers. The team uses Moody s CreditCycle for its annual planning, and, as business continues to grow, will use it across consumer lending from origination and portfolio management to collections. Beyond satisfying executive team needs, pilot results were also vetted by the company s corporate-level internal modeling team and won full approval. The loss-forecasting team is finding Moody s CreditCycle to be a very good productivity/analysis tool, as it is able to perform more analysis and respond to additional requests with greater speed and confidence. The team particularly values: The ability to assess quality of future vintages. The openness of the models (not a black box), the transparency of model drivers and the way they impact performance, and the level of documentation to satisfy regulators. The ability to easily share data, models, assumptions and analysis with crosssectional teams. This wasn t as easy to do in the past, given the nature and documentation of prior models. The ease of use, without extensive training, based on an intuitive interface customized for consumer credit. One user indicated, If Moody s CreditCycle didn t exist, we would be trying to build it ourselves, as other external options just don t come close in analytical capability and in incorporating economics. The ability to easily update economic data. Creating scenarios is exceptionally easy, which saves time. The availability and capabilities of Moody s Analytics credit analysts to help get the most out of the platform and collaborate in addressing complex management requests. If Moody s CreditCycle didn t exist we would be trying to build it ourselves as other external options just don t come close in analytical capability and in incorporating economics. -Credit Card Issuer R INCREASED FORECAST ACCURACY R INTEGRATED ECONOMICS R TRANSPARENT METHODOLOGY R STRESS TESTING & SCENARIO ANALYSIS R INCREASED PRODUCTIVITY & EFFICIENCY R QUANTIFY FUTURE VINTAGE QUALITY The team focuses on forecasting loan delinquencies and charge-offs in order to manage provisions and reserves, budgeting for the group, and near-term planning for collections. It is continuing to expand uses as the broader team becomes more familiar with our capabilities. MOODY S ANALYTICS / Moody s CreditCycle: Benefits & Case Studies / Copyright 2014 8
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