Credit Analyst Interview Questions and Answers

Credit analysts facilitate credit risk management by measuring the creditworthiness of the individual or a firm. Credit analysts are generally employed by banks, credit card companies, rating agencies, and Investment Companies.

Below are our top credit analyst interview questions.

Credit Analysis is the banks observing the analysis and identification of risks wherein a potential for lending. Banks perform both qualitative as well as quantitative appraisals of their clients.

The below diagram sums up the overall Credit Analysis Process.

1. Character – This is a subjective opinion about the trustworthiness of the entity to repay the loan.
2. Capacity – Most important of the five factors, Capacity relates to the ability of the borrower to service the loan from the profits generated by his investments.
3. Capital – This means how much the borrower has contributed to the project (own skin in the game)
4. Collateral (or Guarantees) – Security that the borrower provides to the lender to appropriate the loan in case it is not repaid from the returns as established at the time of availing the facility.
5. Conditions – Purpose of the loan as well as the terms under which the facility is sanctioned.

This is one of the most important credit analyst interview questions. When a company takes debt, they need to pay interest. The interest coverage ratio shows the company how able they are in paying off its interest expenses. All we need to do is to divide EBIT (Earnings before interests & taxes) by interest expense. The higher the ratio, the better the company's ability to pay off the interest expenses and vice-versa.

There are many ways in which financial analysts can value a company. The most common valuation methods are discounted cash flow (DCF) and relative valuation methods. In the first method, we need to find out the free cash flow, and then based on that, we find out the present value of a business. In the second method, we look at other comparable companies and use their metrics and figures to conclude.

Since the debt-capital ratio can differ from industry to industry, there’s no reasonable debt-capital ratio.

• For start-ups, the debt would be pretty low or almost none. As a result, the debt-capital ratio for start-ups would be around 0-10%.
• But if you talk about small businesses, the debt-capital ratio would be a little higher, around 10-30%.
• The debt-capital ratio is important, but many investors/analysts also use the debt-equity ratio. And if you think about the banking or insurance industries, the debt would be too high. As a result, the debt-capital ratio would be around 70-90%.

You must expect this credit analyst interview question. There are a few top ratios that banks constantly use. The debt-equity ratio, interest coverage ratio, tangible net worth ratio, fixed charge coverage ratio, debt-EBITDA ratio, and debt-capital ratio are the most common. Since these ratios can easily portray the financial health of businesses, these are the ones banks have to use the most.

Credit agencies help the market understand the creditworthiness of a business by looking at outstanding debts. But blindly trusting the ratings of credit rating agencies wouldn’t be prudent. We need to look at the risk profile of each organization along with multiple credit agencies’ ratings to be sure about whether to offer a loan to that company or not.

There are many things that I would look at.

• Firstly, look at all four financial statements for the last five years and analyze how the company has been doing financially.
• Then look at the total assets and determine which assets can be used as collateral. And I will also get to know how the firm has been utilizing its assets.
• After that, look at the cash inflow and outflow and see whether the cash flow is enough to pay off the total debt plus interest expense.
• Also, validate the metrics like debt to capital ratio, debt to equity ratio, interest coverage ratio, debt to EBITDA.
• Validate all the metrics of the company are as per the parameters of the bank
• Finally, look at other qualitative factors that may reveal something completely different than the financial figures.

It can also be stated that ‘All debentures are bonds, but all bonds are not debentures.’

DSCR = Net Operating Income/Total Debt Service

DSCR ratio gives an idea of whether the company can cover its debt-related obligations with its net operating income.

• If DSCR<1, it means that the net operating income generated by the company is not enough to cover all the debt-related obligations of the company.
• If DSCR>1, it means that the company is generating enough operating income to cover all its debt-related obligations.

Ans: The rating indicates the credit quality and how successfully the bond can be repaid upon maturity. It is a critical component since the rating is displayed while issuing the bond and immediately creates an image of the quality of the instrument which is issued. The popular rating agencies are:

• Standard & Poor’s
• Moody’s
• FITCH
• CRISIL

The ratings are further classified as 'AAA+,' ' AA,' 'A,' 'BBB+,' and so on, depending on the rating agency's bifurcation. The ratings immediately give the investor an idea about the issuer's position. The higher the rating, the more the probability of the issuer repaying the demand, and the lower the yield. This way, more money can be demanded since the issuer states the strength of their financial position.

There are two types of credit facilities:

• Short term loans, mainly for working capital needs. Short Term loans include overdraft, letter of credit, factoring, export credit, and more.
• Long-term loans are required for Capex or acquisition. It includes bank loans, notes, mezzanine loans, securitization, and bridge loans.

This is a tricky credit analyst interview question because this question tries to understand your client-servicing ability and, at the same time, how well you manage a conflicting situation. You need to answer this question in such a way that both of these conflicting interests can find a middle ground.

• First, since the client is important to the business, you need to handle the request in a completely different way. In normal scenarios, you may reject the loan application because you would value your assessment, and at the same time, you need to think about the prospect of the bank. In this scenario, you wouldn’t reject the loan application but find a middle ground.
• You may offer him a small loan that wouldn’t affect the bank, and for the rest of the loan, you would suggest a step-by-step method that will include the assessment. Since you can’t risk losing a multi-million dollar client, and at the same time, you cannot risk the future of the bank; I feel this is the best way to handle this situation.

As a credit analyst, you may have many skills. But make sure you share only those you're quite good at. If you mention something that you’re just learning, mention that too. Honesty is preferable to finding out that you don’t know something. Credit Analysts are detail-oriented and good with accounting and financial skills. Also, they are excellent in Financial Modeling and forecasting in excel.