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Portfolio Evaluation

Objective

  • Our clients, a leading auto financing company in the United States was growing its portfolio inorganically through acquiring small and medium sized portfolios.
  • They were considering a lot of small Auto loan portfolios for acquisition every month and spending a lot of time to manually ‘evaluate’ the portfolio for pricing decisions.
  • We proposed an automated portfolio evaluation tool that’ll do the following things for them-
  • On providing portfolio details and expected profit margins as input, give the discount factor (on the principal outstanding) as output
  • Predict charge-off and pre-payment accounts along with timelines
  • Develop detailed cash flow of the portfolio till it runs off completely

Methodology

  • Used historical data to develop multiple models to predict propensity for all sorts of ‘bad’ future behaviors at account level (write-off/ early pay-off etc.).
  • Developed life time prediction model to output expected timelines of account level charge off/ pay up.
  • The client wanted a simple tool to be used by the CEO’s office. Keeping that in mind, the solution was built into an MS Excel based tool (with VBA backend) that predicts all important portfolio health parameters as well as dynamically builds detailed monthly cash flow for the portfolio under consideration.

Impact

  • Scientific way to evaluate a portfolio under acquisition on all health parameters- short term and long term.
  • The tool minimizes acquisition risk substantially- given the expected profit margins as input,the tool outputs the minimum discount factor (on the portfolio outstanding value) that the client should quote.

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