THE CALL · CYCLE · 1 OF 5
Late in a long expansion, rival banks are lending on looser terms: fewer covenants, longer interest-only periods. A strong borrower asks you to match.
// THE GROUNDWORK / D · THE ECONOMY18 FILES · ONE MINUTE EACH
THE IN-TRAY · THE GROUNDWORK · D
The Economy
In what conditions?
What neither side controls: the cycle, interest rates, currencies, and the markets that price collateral.
// D1 · CYCLE
THE FIRST QUESTION · CYCLE · 2 OF 5
Two borrowers each grew profit 30% last year: a supermarket chain and a builder of new homes.
Whose profit do you expect to fall further in a recession?
SIGNAL OR NOISE · CYCLE · 3 OF 5
At the start of the year the bank's view of retail property was 'stable'. Since then two large tenants have closed stores across the region, and online sales have taken another step up.
Signal or noise?
THE FIRST QUESTION · CYCLE · 4 OF 5
You want the earliest sign that the economy your borrowers trade in is turning.
Which do you watch first?
SIGNAL OR NOISE · CYCLE · 5 OF 5
The government announces deep cuts to its building programme for the next three years. A borrower earns 70% of its revenue from public construction contracts.
Signal or noise?
5 FILES · PICK A CALL ON ANY OF THEM
// D2 · RATES
SIGNAL OR NOISE · RATES · 1 OF 4
The yield curve has inverted: two-year government rates now sit above ten-year rates.
Signal or noise, for a lender?
THE CALL · RATES · 2 OF 4
A borrower's loan is at a floating rate. It was sized when base rates were 2%; they are now 6%.
What does the bank re-test first?
THE NUMBER · RATES · 3 OF 4
A borrower's loan costs 7% a year. Inflation is running at 5%, and the borrower's selling prices rise with it.
Roughly what real rate is it paying?
THE CALL · RATES · 4 OF 4
Your rate scenario for the year assumed the central bank would cut twice. It has just raised instead, and markets now expect further rises.
What do you do with the borrowers stressed on the old scenario?
4 FILES · PICK A CALL ON ANY OF THEM
// D3 · CURRENCY AND TRADE
THE FIRST QUESTION · CURRENCY AND TRADE · 1 OF 5
A furniture importer buys in euros and sells in US dollars at fixed list prices. The dollar has fallen 15% against the euro.
Where does the fall show first?
WHAT THEY HEAR · CURRENCY AND TRADE · 2 OF 5
An exporter's CFO says: 'The stronger dollar has hurt us, but only on translation.'
What is the CFO telling you?
THE FIRST QUESTION · CURRENCY AND TRADE · 3 OF 5
An exporter sells a commodity priced in US dollars and pays its costs in its home currency. The home currency has strengthened 20% against the dollar.
What happens to its margin?
SIGNAL OR NOISE · CURRENCY AND TRADE · 4 OF 5
An importer's policy is to hedge half of the next twelve months' purchases. Its currency has fallen 25% in three months, and the board proposes to stop hedging until the currency bounces back.
Signal or noise?
WHAT THEY HEAR · CURRENCY AND TRADE · 5 OF 5
A group's CFO says: 'The overseas subsidiary's results are in our profit, but the exchange losses on its net assets went to reserves.'
What is the CFO describing?
5 FILES · PICK A CALL ON ANY OF THEM
// D4 · COLLATERAL MARKETS
THE NUMBER · COLLATERAL MARKETS · 1 OF 4
An office building earns US$1.0m a year of net operating income. Buyers price such buildings at a 5% yield, so it is valued at US$20m. The loan against it is US$12m.
If the yield buyers want rises to 6%, what is the loan-to-value?
SIGNAL OR NOISE · COLLATERAL MARKETS · 2 OF 4
A loan is secured on a specialised cold-store warehouse. Similar warehouses in the region have taken two years to sell.
Signal or noise?
SIGNAL OR NOISE · COLLATERAL MARKETS · 3 OF 4
A loan is secured on a shopping centre valued 14 months ago. Since then comparable centres have sold at yields a full point higher, and the anchor tenant has given notice.
Signal or noise?
THE NUMBER · COLLATERAL MARKETS · 4 OF 4
A bank lent 65% of the value of a factory valued at US$10m. If it has to sell, it expects a forced-sale discount of 30%, and selling costs of 5% of the sale price.
What does it recover against the US$6.5m loan?
4 FILES · PICK A CALL ON ANY OF THEM
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