Uncategorised
Written by Alisa Walker
May 26, 2023
Corporate lending, particularly syndicated loans of large amounts tends to be low margin business for banks due to the high RWAs associated and extremely competitive pricing. Here are some digital trends to consider and their relevance to syndicated loans.
Whilst this may be starting to turn a corner as interest rates rise and credit potentially becomes more scarce (although unlikely given the pressure on bank CEOs to increase profitability through asset growth), the entire market is still ripe for innovation and digitalization.
Here’s some ideas:
Particularly in the Middle and Back Office which involves the extracting of data from loan contracts, term sheets or other sources and then keying this data into internal bank systems or third-party loan booking systems.
Hopefully you’ve already ‘automated’ this as much as possible by standardizing the process with checklists and templates. Even better, hopefully you’ve offshored these activities to lower cost centres. Best, you should use advances in NLP (Natural Language Processing) technology to automate the reading, extraction from and digitalization of documents.
The sophistication of the AI is still developing and will always require an element of training to get up to the level where it could replace a trained lawyer or other person. But start simple for now, then gradually increase the complexity of the data you ask the AI to extract and in time you will have a powerfully trained model that can read your contracts digitally.
There have been huge advances in the market for project management type of software that is making individuals, teams and companies more productive and more digitally connected. However, this has not been so true in the banks, which often still use old software, or a combination of tools, and rely mostly on their front line and middle office people to have become familiar enough with these legacy systems to get their jobs done effectively.
Don’t underestimate the impact of this on your people, employee mentality, culture and your ability to provide a good service to clients. Young talent (your current interns and those coming through the grad schemes) are the most digitally savvy generation and expect modern digital technology in the workplace. Look at the speed and technology used on trading floors today. Compare that to some departments that are still faxing drawdown confirmations in syndicated loans (rare but still true)!
With the right workflow or deal management software you will also rapidly increase the speed of upskilling new joiners to the syndicated loans desk, crucially important in a pressured labour market and where you want your workforce to be adaptable.
This is the holy grail for many digital transformation leaders, lawyers and syndicated loan negotiators – but the technology is already here, working and advancing rapidly. In some of the major law firms at the moment, all that exists is a sort of glorified Ctrl+F where a lawyer can search for particular keywords across a portfolio of contracts. In the banks what exists is the ability to pull a bunch of datapoints from existing software tools into a database, so long as those datapoints have been captured in a standardized fashion by front-line or middle office bankers that have keyed them in.
What’s needed is the ability to search for, as an example, ‘all the deals in my bank where I have a sustainability-linked covenant’. Or a more specific enquiry like: ‘all the deals where I have a Minimum Transfer Amount of >£10m in the transferability clause’. And then for the software to give me a concise overview of all those contracts and the ability to navigate them.
You will recall in the run up to Libor transition that it involved a lot of manual work of individuals (sometimes contractors hired specifically for the task) to go through all the back book of loan contracts and identify the Libor drafting. And then an ongoing, intensive exercise of tracking what Reference Rate draftings were finally agreed across hundreds (if not thousands) of contracts.
But if we start now with digitalizing loan contracts, training the AI models and capturing data with modern software, then the future will look a lot more digitalized, data-driven and less complex. And less complex often means lower cost and lower risk – which is two thumbs up in an increasingly competitive and highly scrutinized business such as corporate banking.
All in all, syndicated loans needs to and will digitally transform. You may have heard of other approaches to innovation such as utilizing blockchain to execute and manage deals, smart contracts and the like. But in a low-margin business such as syndicated loans, I suggest you start small and work gradually to transform.
Ultimately any of the new technologies of the future will not be scalable if you have not first got a grip on digitalizing loan contracts and the data within them.
Written by Theresa Jung
4 Dec, 2024
Written by Theresa Jung
25 Nov, 2024
Written by Theresa Jung
20 Nov, 2024
Written by Theresa Jung
18 Nov, 2024
Written by Theresa Jung
11 Nov, 2024
Written by Theresa Jung
8 Nov, 2024