OakNorth, the next-generation credit and monitoring platform provider has announced its signing of a commercial agreement with PNC Bank, an American bank holding company and financial services corporation.

Businesses need liquidity to overcome the challenges being presented by COVID-19 and get back on their feet when the recovery begins. They are looking to banks and lenders to support them in this crucial period – either directly, or through Government loan programs. On the other hand, lenders are concerned with the impact of COVID-19 on the health of their current loan books.

Given the unprecedented scale and dynamics of this crisis, trying to assess credit risk based on previous risk ratings doesn’t make sense as all previous correlations are broken. As a result, lenders need to be able to:

• Reassess credit risk based on forward-looking scenarios which factor in the impact that COVID-19 is having on businesses,
• Follow through on these stress scenarios on a granular, loan-by-loan basis, rather than just at the portfolio level;
• Monitor all credits more closely as sectors have become more volatile post-COVID-19, and;
• Re-underwrite these loans at depth and bring consistency to their credit approach through the crisis, running risk analysis consistently.

This assessment requires a fundamentally different approach to credit analysis and monitoring. So, to support these lenders, OakNorth has developed a “COVID Vulnerability Rating” (CVR) Framework, which helps lenders undertake portfolio diagnostics to rate loans from 1-5 based on their vulnerability to the new economic environment, with one being least vulnerable, and five being most vulnerable. The ratings are based on multiple factors including liquidity, debt capacity, funding gap and profitability. It integrates over 130 proprietary subsector-specific COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on critical financial metrics such as revenue, operating costs, working capital and CAPEX.

Under the partnership agreement, PNC is deploying OakNorth across its C&I and CRE portfolio, mapping individual borrowers to 130 domains. PNC and OakNorth will run portfolio diagnostics periodically to factor the rapidly evolving scenarios of COVID-19 across subsectors and regions.

“Never has the need for enriched underwriting, credit science and a forward-looking approach been more important in commercial lending than it is right now with the ongoing challenges posed by COVID-19. Instead of playing for defence, spending time trying to figure out where their current books stand, running scenarios based on financial models that are no longer relevant, and trying to minimise the downside, we are working with lenders to enable them to get on the offensive, focusing on growing their business and orchestrating a consistent customer financing strategy,” said Rishi Khosla, co-founder of OakNorth.