OakNorth’s “COVID Vulnerability Rating” Framework

OakNorth, founded in 2015, is a credit science platform that leverages machine learning, credit expertise, and data sets to model a forward-looking view of a borrower’s financial situation guided by industry benchmarks, macroeconomic drivers, and business-specific scenario analysis. OakNorth Platform is licensed to banks around the world and is used by OakNorth in the UK to lend off its balance sheet (via OakNorth Bank).

Project Scope:

The challenges imposed by Coronavirus have led to truly global crisis affecting the entire economy with no sectors unaffected by it. One of the major drawbacks has resulted in commercial lenders suddenly having to deal with ambiguous scenarios which have severely affected their decision-making capabilities. OakNorth has developed their “COVID Vulnerability Rating” (CVR) Framework which enables commercial lenders to re-underwrite loans and brings consistency to their credit approach through the crisis, running risk analysis consistently. The solution was implemented in their  Commercial Lending division with go-live in January 2020.

Need for the framework:

Businesses, especially due to the uncertainty brought about by COVID-19 require liquidity to tide through the challenges being presented by the pandemic and get back on their feet when the recovery begins. These businesses are very likely to be dependent on banks and lenders to support them in this crucial period. This support is either directly or through Government loan programs. At the same time, banks and lenders are concerned with the impact of COVID-19 on the health of their current books.

The unprecedented scale and dynamics of this crisis have meant that assessing credit risk based on previous risk ratings or more traditional methods are not useful as all previous correlations are no longer relevant.

As a result, lenders need to reinvent their assessment framework and assess credit risk based on forward-looking scenarios that factor in the impact that COVID-19 is having on businesses and then follow through on stress scenarios on a granular, loan-by-loan basis, rather than just at the portfolio level. They require additional monitoring of all loans more closely as sectors have become more volatile post-COVID-19 pandemic. There is a need to re-underwrite certain loans at depth and bring consistency to their credit approach through the crisis, running risk analysis consistently

Solution Implemented:

The framework is adaptable to work across geographies. OakNorth’s “COVID Vulnerability Rating” (CVR) Framework can be used to support lenders overseas, as well as its balance sheet lending activities via OakNorth Bank in the UK. The framework integrates over 133 proprietary subsector-specific COVID-19 stress scenarios with regional overlays, incorporating assumptions for impacts on key financial metrics such as revenue, operating costs, working capital, and capex. The Framework enables commercial lenders to re-underwrite loans and brings consistency to their credit approach through the crisis, running risk analysis consistently.

Based on the Framework, the OakNorth Platform helps lenders undertake portfolio diagnostics to rate loans from 1-5 based on their vulnerability to the new economic environment, with 1 being least vulnerable, and 5 being most vulnerable. The ratings are based on multiple factors including liquidity, debt capacity, funding gap & profitability, and can be dynamically customized to reflect the lender’s credit risk criteria and appetite. The Framework enables commercial lenders, including OakNorth’s recent partner bank PNC Bank, to identify the high vulnerability loans, re-underwrite loans, and bring consistency to their credit approach in the new normal, as well as monitoring all credits more closely. This is imperative given that sectors have become more volatile post-COVID-19.

As a result of the platform being web-based and fully cloud-hosted, the CVR Framework can be seamlessly integrated with existing systems that lenders may already have put in place, or to operate in a fully standalone configuration.

Speed to Market:

OakNorth Bank started looking at the potential for international supply chain disruption when COVID-19 began to emerge in January 2020. The team reverses stress-tested based on 34 sector-specific COVID-19 stress scenarios when news began circulating of a potential lockdown in its home market the UK. OakNorth came up with a “COVID vulnerability rating” (CVR) framework evaluating the impact to businesses based on a six-week lockdown, followed by reviews of three and six-month lockdowns. Now, the framework is even running stress-tests on what the impact could be if there is a nine-month lockdown for certain industries and even further after that.

Project Impact:

Using the CVR Framework, OakNorth Bank has been able to play a key part in supporting growth businesses to survive the pandemic. OakNorth had initial CBILS allocation increased and was then onboarding to the Government’s CLBILS too. In addition to the Government schemes, OakNorth was able to find opportunities to lend to UK businesses averaging £160m in new loans every month since the lockdown. Internationally the company has extended the core Platform to develop an end-to-end PPP and MSLP solution – from application and document collection to pre-screening and forgiveness to support US lenders. The process design ensures that participating banks retain complete control of key decision-making and risk-management processes, including loan eligibility, authentication criteria and checks, compliance review, the credit decision, and the forgiveness eligibility and approval.

IBSI View:

CVR framework backed by strong AI capabilities has allowed OakNorth bank to drive a niche and gain an advantage during the uncertainties brought on by the covid-19 pandemic with a swift credit risk response. It has helped OakNorth to implement Government-funded program as well as increase it’s own portfolio while other lenders are hesitant to lend.

Key Facts:

Financial Institution: OakNorth Bank
Headquarters: United Kingdom
Solution Provider: OakNorth
Solution: COVID Vulnerability Rating