Credit portfolio due diligence
Credit portfolio due diligence in Panama
A loan portfolio is worth what can be collected from it, not what the book balance says. The distance between those two figures is, almost always, the reason an independent review is commissioned.
DB Consultants Group reviews credit portfolios for banks, finance companies, credit unions, portfolio buyers and investors assessing a financial institution in Panama.
When it is commissioned
Who needs a portfolio reviewed
- Whoever is buying a portfolio. Setting the price means estimating real recovery, not applying a rule-of-thumb discount to the balance.
- Whoever is buying into or investing in a financial institution. In a bank or a finance company the portfolio is the asset; reviewing it is reviewing the company.
- The institution’s own board. An independent reading of classification and provisions, before the regulator or the auditor produces one.
- Whoever is securitising or assigning a portfolio. The investor will ask for vintage and behaviour analysis; it is better to have it beforehand.
- The company that finances its own customers. Retailers, distributors and developers that extend direct credit and carry a portfolio nobody analyses with a banking lens.
The scope
What gets reviewed
Quality and classification
Verification of the category assigned to each loan in the sample and recalculation of provisions under the Superintendency of Banks’ credit risk rules. This is usually where the difference appears.
Vintages and behaviour
Analysis by year of origination: how each vintage has deteriorated, how loans migrate between categories, and what share returns to current after falling into arrears.
Concentration
By borrower, by economic group, by sector and by region. A portfolio with a healthy average indicator can have its risk concentrated in a handful of files.
Collateral
Existence, currency of appraisals, perfection, priority of claim, and the collateral-to-balance ratio. Collateral that is badly constituted is not collateral.
Origination and collections
How loans are approved and how they are collected. A portfolio’s problems almost never start in collections: they start in the criteria used to approve.
Refinancings
What share of the current portfolio is current because it was restructured. It is the indicator that most flatters arrears and the one that deteriorates fastest.
The process
How the review is carried out
- Portfolio profileStratification by balance, product, tenor, year of origination, sector and status. The full picture before a single file is opened.
- Sample designA sample targeted at the largest borrowers and the highest-risk tranches, plus a random sample of the rest, so the result can be extrapolated.
- File reviewDocumentation, capacity to pay evidenced at the time of approval, collateral, compliance with conditions, and traceability of the decisions.
- Recalculation of provisionsLoans are reclassified where warranted and the difference against what is booked is quantified, under the criteria applicable in Panama.
- Recovery estimateExpected loss by segment and a projected recovery cash flow, which is what makes it possible to price the portfolio.
- Report and presentationFindings, quantification, recommendations and a presentation to the board, the buyer or the investor.
Timing depends on the size of the sample and the state of the files: three to six weeks in most engagements.
Deliverables
What the client receives
- The full portfolio profile, with the stratification and the indicators by segment.
- The provisioning gap between what is booked and what the review produces, with file-level detail for the sample.
- The recovery estimate and, where the engagement is a purchase, the price range it supports.
- The process findings in origination, monitoring and collections, with concrete recommendations.
- The model in a spreadsheet, open, so the institution can repeat the exercise.
The firm formally added this service to its practice areas. See the note on the expansion of practice areas (in Spanish).
Warnings
What an apparently healthy portfolio hides
- Low arrears through refinancing. Restructuring returns a loan to current status without the borrower having improved.
- Recent vintages that have not matured. A portfolio that grew fast last year looks healthy because it has not had time to deteriorate.
- Collateral without a current appraisal. The recorded value can be years old and bear no relation to today’s market.
- Concentration hidden by economic group. Separate borrowers in the system that answer to the same owner.
- Provisions calculated on paper. The correct classification is not always the one booked, and the difference is paid for at purchase.
Common questions
Frequently asked questions
How does this differ from an audit?
An audit verifies that the financial statements are fairly presented under the accounting standards. This review estimates how much can be recovered from the portfolio and what risk it carries, which is a different question with a different scope.
Are all files reviewed?
No. A sample is reviewed, targeted at the largest borrowers and the highest-risk tranches, plus a random sample of the rest, so that the result can be extrapolated to the whole.
How long does it take?
Three to six weeks in most engagements. It depends on the size of the sample and, above all, on the state of the credit files.
Can it be used to price a portfolio for sale?
Yes. The expected loss estimate and the projected recovery cash flow are the basis of the price range, for the buyer and for the seller alike.
Does it apply to companies that are not banks?
Yes. Retailers, distributors and developers that finance their own customers carry portfolios that are almost never analysed with a banking lens, and that is where the largest findings tend to appear.
Can a foreign buyer rely on the report?
Yes. The report is delivered in English, with the classification criteria of the Superintendency of Banks explained rather than assumed, so that a committee outside Panama can read the provisioning gap without having to interpret local regulation on its own.
Do you work from the institution’s data or do you need access to the files?
Both. The stratification is done from the database; the quality review requires access to the physical or digital files of the sample.
Is the engagement confidential?
Yes. The nature of every engagement is confidential and is not disclosed without the client’s written authorisation.
Let’s talk about your portfolio
A first conversation is enough to define the scope, the size of the sample and the timeline. It is confidential and commits you to nothing.