The metodology of the evaluation of a commercial bank loan portfolio on basis of credit risk, profitability and liquidity factors

Abstract

At all times changes of economic indicators and development of technologies are determining the increased attention of banks and supervisory institutions to methods of assets evaluation and management. The economic indicators of the transition economy countries are improving, loan market is growing, and the loan portfolios of commercial banks remain creditable; however, the ratio of provisions and loans that is indicating the losses expected by banks of the transition economy countries in the future, is deteriorating. Banks need to reconsider the evaluation principles of individual loans and the whole portfolio. As in other countries where the traditional banking is dominating, loans banks of the transition economy countries compose the major part of banks' assets, and loan interest income makes a significant share of banks' income. Inappropriate loan portfolio evaluation might have negative impact for a commercial bank's performance, for the overall banking system, and for the economic growth of the country. It is not enough for a bank to have a precise strategy, high lending culture, and observance of general principles to ensure the further growth of profitable loans. It is necessary to apply various evaluation methods of historical and present data, of ratios and factors enabling to implement coherent and comprehensive loan portfolio evaluation, and to encompass different factors as far as possible. Due to a complex business environment and intense competition between banks, it is not enough to evaluate a commercial bank loan portfolio only through the aspect of credit risk, i.e. loss probability level aspect, as is suggested by the scientists. As to every business subject striving for a successful performance and further development, it is essential for a bank to earn profit by financing the other subjects, and to establish the level of assets liquidity.