How to develop a risk-based pricing methodology for lending
Overview
A multi-national African based bank required the development of a Risk-based pricing tool that allows the bank to determine client and loan specific pricing that is tailored to the risk profile of the overall deal, taking into account security (LGD) and the risk score of the client (PD)
Solution
Aspect Advisory designed and implemented a holistic automated (risk-based) pricing methodology. The model considered various metrics such as the client’s funding mix, operating expenses, ECL, capital expenses, taxes, hurdle rate etc.
Result
- Competitive market pricing;
- Full absorption cost allocation;
- Risk-adjusted pricing at client/facility level
Themes
Competitive pricing in the market; Optimised capital utilisation; Sustainable pricing strategy
Skill Sets
- Credit risk, Risk scoring, Collateral valuation, Data visualisation & Financial modelling
Business Area
- Risk Management
- Pricing Strategy
- Finance and Treasury