Purpose

The credit migration matrix summarizes trends in risk of default for commercial loans. Portfolio Insights customers have access to a daily credit migration matrix representing activity over the 12 months prior to the report date. A U.S. commercial banking credit migration matrix is also available to Market Insights customers. It is derived from commercial loans across Precision Lender’s banking clients.

 

Risk Ratings:

  • For each loan, the probability of default is provided by the client via the RA process. These values determine which risk category loans fall into at the beginning and end of a 12-month interval.
  • The S&P Global standard was used to assign loans a risk category on an ordinal scale from AAA to CCC. Reference: Table 9 Average Values.
  • Bins were constructed such that the average values for an S&P rating are half-way between the minimum and maximum probability of default (Loss) for that rating.

 shows risk ratings chart

 

Migration Matrix:

  • The numerical values in the matrix represent the probability of a loan transitioning from one risk rating group at the beginning of the year to other risk rating groups at the end of the year.
  • The row category represents the risk rating at the beginning of the year. The column categories represent risk rating at the end of the year.
  • Loans which are paid off or charged off mid year are assigned a terminal rating status rather than risk rating. If a client stops providing status on a loan with a maturity date in the future, it is marked unknown.
  • Example:  All loans which were initially rated A+ are tallied in the 5th row of the chart. 42.26% of loans that were initially rated A+ were still rated A+ at the end of the year. 1.74% of those A+ loans improved to AA- risk rating by the end of the year and .82% of those loans worsened to an A rating. 30.50% of those loans were paid off before the end of the year.

 shows the migration matrix chart