Customers Bancorp in Wyomissing, Pa., is partnering with OakNorth, a U.K.-based credit monitoring software company, to help it identify weak spots in its loan portfolio.
Both companies say the partnership is timely, as OakNorth’s data-driven approach will help the $11.5 billion-asset Customers identify which sectors and businesses in its loan portfolio will be hardest hit by the coronavirus crisis.
The OakNorth platform, which is currently licensed to 17 banks globally, including OakNorth Bank in the U.K. and NIBC Bank in the Netherlands, targets borrowing needs of a group it calls the “missing middle.” These are businesses that are looking for loan amounts between $1 million and $25 million.
Using machine-learning algorithms, the “insight,” or credit analysis arm of its business provides swaths of data to its partner banks to help them make better — and speedier — lending decisions than a credit analyst could pull manually. The “foresight” part of its business looks out for worrisome signs that credit quality is deteriorating, and gives the bank a chance to flag potential issues with its borrowers.
When it comes to the current standstill, where companies are forced to shutter for indefinite periods of time, “We help banks understand which businesses are most vulnerable and likely to need government support,” said Rishi Khosla, co-founder of OakNorth. “And we’re starting to work with banks to help them understand on the other side of the crisis, how do you help reboot companies that may have depleted their working capital reserves so they can start functioning again?”
As the crisis materialized in recent weeks, OakNorth examined its clients’ loan books and ran reverse stress tests — starting with adverse outcomes, such as a plunge in revenue, and looking for scenarios that might cause such an outcome — to determine their most vulnerable businesses. It created what it refers to as a “COVID vulnerability rating” by identifying which businesses could withstand six-week, three-month or six-month shutdowns. And instead of making assumptions about an industry as a whole, such as restaurants, it will assess the risk for each individual entity.
“We helped clients get a data-driven approach to identify where to focus their relationship managers and credit teams on the businesses that will need the support,” said Khosla.
Jay Sidhu, Customers' chairman and CEO, was drawn to OakNorth’s forward-looking approach.
“In the United States, banks today rely on historical information at least a quarter old, if not more,” Sidhu said. “This data will be very helpful in showing us which industries in our portfolio are more stressed than others and which metrics we’d be looking at to determine risk profile.”
Sidhu said Customers will start by stress-testing its existing portfolio using the OakNorth model and later decide how it can integrate it into other technologies the bank has in place, such as nCino and Salesforce.
Sidhu said that, when the economy starts recovering, he expects the OakNorth platform to speed up Customers’ underwriting processes when extending new credit.
“My definition of fintech is something banks should have done but chose never to do,” Sidhu said. “This is a prime example — it’s a smart way of underwriting and smarter way of portfolio management. Banks are so darn focused on the way they’ve done it in past.”
Although OakNorth has several U.S. clients, Customers is the first U.S. institution to roll out the platform across all of its loans.
