What is a Credit Analyst
A credit analyst is a financial professional who possesses expertise in assessing the creditworthiness of securities, individuals or companies. Credit analysts determine the likelihood that a borrower can repay his financial obligations by reviewing the borrower's financial and credit history and determining whether economic conditions will be favorable to repayment.
Credit analysts are proficient in financial statement analysis and use ratios when analyzing the financial history of a potential borrower. They decide whether the borrower has adequate cash flows by comparing ratios with industry standards and benchmark data, other borrowers, and historical trends. For example, a credit analyst at a bank may examine a company's financial statements before approving a loan for a new warehouse.
BREAKING DOWN Credit Analyst
Credit analysis is a specialized area of financial risk analysis. Credit analysts are also referred to as credit risk analysts. A credit analyst evaluates the level of risk and determines the interest rate and credit limit or loan terms for a borrower. Analysts use the research to make certain that the borrower receives an affordable loan and to help shield the lender from default.
Credit analysts work at credit unions, financial institutions, investment companies, foreign banks, investment banks, commercial banks, credit rating agencies, insurance companies and asset management companies. A credit analyst gathers and analyzes financial data, such as the purpose of a loan, payment history, liabilities, wage earnings, assets and other information for warning signs that might present financial risks. This data is used to recommend approval or denial of a loan or credit. This data also determines whether to increase or reduce credit limits or charge additional fees.
A credit analyst plays an important function in the overall well-being of the economy. Credit stimulates the economy and helps it operate on a daily basis. Credit analysts provide unbiased recommendations to banks that allow them to offer loans, credit and lines of credit to individuals and businesses for autos, homes, student loans and business funding.
Credit Analysts' Ratings
Credit analysts may also issue credit scores. For individuals, credit score generation is typically automated through algorithmic processes based on a person's credit history, on-time behavior, bankruptcies, etc. - and is represented by a three-digit number ranging from around 200 to 800. The most common type of individual credit score is the Fair Isaac, or FICO score.
For debt issuers and their instruments such as bonds, credit analysts assign scores based on letter grades such as AAA, AA+ or BBB. Below a certain rating, a company's debt is referred to as "junk" or below investment grade, whereby bonds typically carry higher yields to accommodate for the additional credit risk. Sovereign governments can also have credit scores on their bonds. These analysts typically work at credit ratings agencies such as Moody's or Standard & Poor's (S&P). Insurance companies are also rated on their credit risk and financial stability by ratings agencies such as AM Best.
A credit analyst may recommend a business loan or business credit based on certain risk factors, such as economic changes, stock market fluctuations, legislative changes, environmental changes and compliance with regulatory requirements.
For example, if a business client is struggling to pay employee payroll and business expenses, this may be a warning sign of a decline in revenue and potential bankruptcy, which may affect the bank’s assets, revenue, ratings and reputation.
Financial data determines the level of risk involved in extending credit so a bank can decide if it wants to proceed with approval. If the bank decides to proceed, the credit analyst monitors a borrower's performance and may issue recommendations to terminate the loan agreement if it becomes risky. This helps banks manage and balance risks and generate revenue.
For example, a credit analyst could recommend a solution for a person who has defaulted on his credit card payments. The analyst can recommend reducing his credit limit, closing his account or switching to a new credit card.