Credit & Risk Solutions

Research — May 5, 2025 Strengthening Risk Management: How a Latin American Bank Uses Credit Analytics for Robust Risk Assessment Henrique Naegele and Isabella Vallory This case study is written and published by S&P Global Market Intelligence, a division independent of S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings. A robust credit risk management process is often complex, involving different models, historical data, and expert judgement. Within financial institutions, the Risk Management Department plays a critical role -not only to comply with regulations and standards, but more importantly to quantify, eliminate and mitigate risk. A common risk management industry practice is the establishment of an internal due diligence team, which is responsible for monitoring and when necessary, challenging the assessments made by the underwriting team. One recurring challenge in this process is the availability of data needed to build reliable statistical models. Access to historical probability of default (PD) across different industries and geographies is essential. Furthermore, these models must be validated and calibrated to provide an objective benchmark against which to assess internal analyses ensuring their accuracy and effectiveness. This Latin American bank, headquartered in São Paulo, Brazil, with offices throughout the continent, ranks among the largest banks in the world. It operates as a commercial bank, maintaining a strong presence as a lender to small, medium, and large enterprises. The bank manages billions of dollars in exposures diversified across various industries. Accurately measuring credit risk for any type of client is critical to the bank's business operations. While industry expertise and internal models are essential, they are often insufficient on their own. The bank must also seek independent evaluations with statistical models to conduct sanity checks on internal results and, when necessary, challenge the outcomes of its internal models. Moreover, the bank requires sophisticated tools to effectively monitor shifts in credit quality across its entire loan portfolio, tracking changes from one quarter to the next in response to evolving market conditions and financial statements. Recognizing these challenges, the bank's second line of defense risk department embarked on a mission to find a solution that would enhance its post-underwriting due diligence process. This solution must be easily scalable, rapid, and reliable, offering comprehensive coverage and exceptional user support to ensure the bank's continued success in a competitive market. Pain Points During our diagnostic process with the client, S&P Global Market Intelligence understood their challenges, and, in examining their current workflow, determined that a solution that delivered fast, accurate PD score for their portfolio was a high priority internally. The objective was to propose solutions capable of addressing the following challenges: 1. Comprehensive Coverage: The bank’s portfolio is highly diverse, with exposure across multiple industries and geographies. 2. Replace Manual Input with Automation: With the need to manage a large volume of credits, the bank required a solution that minimized manual intervention. The goal was to streamline their workflow by implementing a system that could generate scores with minimal user input and leverage their proprietary data. This resulted in material time and cost savings. 3. Depositary of Financial Data for Private Companies: The bank aimed to store financial data for their clients in a reliable and secure interface, facilitating future revisions of corporations. 4. Accuracy and Efficiency: The ideal solution for the Risk Department needed to effectively monitor creditworthiness and default potential while integrating seamlessly into existing workflows. The ability to upload internal financials would enable swift adoption and minimize the need for extensive training. 5. Outstanding Implementation Team: Having a specialized Customer Success and Support Teams focused on credit and product support was crucial. They required a support team available 24/7 to assist in learning and effectively using the tool. 6. Seamless Compliance Reporting: To meet regulatory and compliance requirements, the bank required a solution that facilitated efficient and transparent reporting. The ability to present clear, audit-ready findings to their auditors was a critical necessity. Solution After conducting a detailed review by our specialist team, it was recommended the adoption of S&P Market Intelligence’s Credit Analytics. This solution integrates sophisticated methodologies with robust data from more than 400M+ entities globally to estimate PD and credit scores, enabling organizations to efficiently monitor risk exposure to counterparties and investments globally. Credit Analytics provides a comprehensive view of credit risk exposure through dynamic analytical models that generate actionable credit risk indicators. These models are both market-oriented and fundamentals-driven, delivering PD and credit scores designed to broadly align with ratings from S&P Global Ratings. The solution offers transparency into the drivers of default risk and facilitates scenario analyses. It covers more than 400M+ entities, includes a method for generating scores based on limited data, and includes a function whereby clients can also upload their own proprietary data and run models directly within the platform. Key Features and Benefits 1. PD Models: Credit Analytics calculates PD using four advanced methodologies, ensuring flexibility and accuracy: PD Fundamentals: This model evaluates the likelihood of default over multiple time horizons using financial statements, proprietary risk metrics, and one of the world’s largest financial databases. It measures 1- to 5-year default risk for public and private banks, corporations, and REITs of all sizes. PDs can be mapped to lowercase letter credit scores (e.g., ‘bbb’) for comparability. The model provides global coverage, spanning over 250 countries and 20+ sectors, regions, and industries. CreditModel: This statistical model uses financial statements and macroeconomic data to generate quantitative credit scores that statistically align with S&P Global Ratings. These scores can also be mapped to observed default rates (e.g., 1.2%), providing a precise measure of default risk. PD Model Market Signal: For public companies, this model captures relevant risks by considering market information. It is trained on a comprehensive database of public company defaults and builds upon the standard Merton structural approach. RiskGauge Scores: The RiskGauge Score delivers a holistic credit risk assessment, combining insights from the PD Fundamental, PD Model Market Signal, and CreditModel™ scores. Results and Client Feedback 1. Coverage - During the testing phase, Credit Analytics demonstrated comprehensive coverage, exceeding client expectations. After testing their portfolio against our coverage, the client was highly satisfied, particularly upon learning that our credit analytics encompass a diverse range of over 400 million entities, including private companies in Brazil and Latin America. 2. Methodology - The client reviewed our whitepapers and was impressed with our methodology for calculating Probability of Default scores, noting its strong alignment with S&P Ratings standards. They expressed satisfaction with both the PD and Credit Model scores due to the consistency of the outputs with the ratings. Additionally, the bank appreciated the PD Market Signal model, which is particularly relevant for their coverage of public corporations. They also valued the RiskGauge model, which incorporates market sentiment considerations for point-in-time scores that reflect the daily fluctuations in market conditions. 3. Ease of Use - By utilizing our Excel plugins, the client seamlessly integrated PD, S&P Global databases and proprietary data into their workflow. The plugin provided the automation and efficiency they required, all while necessitating minimal training. Additionally, the S&P Global Market Intelligence Team collaborated with the client to develop customized templates to further support their needs. For instance, a proprietary data upload template was created, along with a template designed to retrieve all credit scores for their complete portfolio directly in Excel. 4. Automated Reporting - Additionally, the client was particularly pleased with our RiskGauge report functionality, which generates fully customizable reports with a single click, providing comprehensive details on the PD calculation process. This feature provided a holistic approach to assess risk and sharing insights to management, by easily generating a report. S&P Global Market Intelligence’s Credit Analytics solution equipped the Latin American bank with an automated, scalable, and efficient tool to streamline its risk measurement processes. This partnership not only addressed the bank's immediate challenges but also strengthened its ability to manage its diverse portfolio with greater confidence. By leveraging advanced analytics and comprehensive support, the bank is now better positioned for long-term success in a competitive market, ensuring robust credit risk management and informed decision-making. PRODUCT To Learn More About Credit Analytics Click Here