Industry Credit Risk

Assessing and monitoring industry credit risk is a critical component of managing portfolio risk.

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Introduction

Credit Benchmark Industry Schema

In addition to their internal ratings, banks also include their internal industry classifications for each entity. Credit Benchmark has developed an industry schema into which the banks’ industry categories are mapped.

The Credit Benchmark industry schema provides a hierarchical taxonomy going from broad categorisations (such as the Industry or Super Sector) down to the most granular one (Sub Sector).

To illustrate this, a portion of the hierarchy for Corporate Industrials is shown.

For example, Trucking (Sub Sector) is a more granular segment within Industrial Transportation (Sector), which is more granular than Industrial Goods & Services (Super Sector), which itself is a more granular categorisation of Industrials (Industry). Industrials falls within the wider classification of Corporates (Entity Type).

Entity Type	Industry	Super Sector	Sector	Sub Sector
Corporates	Industrials	Industrial Goods & Services	Industrial Transportation	Delivery Services
Corporates	Industrials	Industrial Goods & Services	Industrial Transportation	Marine Transportation
Corporates	Industrials	Industrial Goods & Services	Industrial Transportation	Railroads
Corporates	Industrials	Industrial Goods & Services	Industrial Transportation	Transportation Services
Corporates	Industrials	Industrial Goods & Services	Industrial Transportation	Trucking

Banks Industry Schema

Banks use a range of different industry classifications for internal purposes. Some banks use international and national classifications such as NAICS, SIC, NACE, ANZSIC codes. Others have developed their own classifications. The use of specific national industry schemas is generally related to the main geography of the bank. For instance, a US-based bank might be more likely to use NAICS codes. Credit Benchmark has developed an internal industry classification schema broadly based on a range of national and international industry classification schemas to represent a more global view. As part of Credit Benchmark’s process for mapping entity-level data, Credit Benchmark uses the industry metadata from banks combined with external reference data to derive a consensus industry classification for each entity.

Consensus Industry Classification Example

Here, 3 banks submit their internal credit rating and metadata for an entity. One bank sends a NAICS code, another a SIC code and the third one an ANZSIC code.

Credit Benchmark has developed and maintains mappings from these and other industry classifications to the common Credit Benchmark schema.

The entity is then mapped to the Credit Benchmark Sub Sector Trucking.

Bank Contributed Code
NAICS 484000
SIC 4213
ANZSIC 4610

Credit Benchmark Sub Sector
Trucking

What Factors Do Banks Take into Account When Assigning the Industry of an Entity?

Different industries face distinct challenges, opportunities, and risk factors that can significantly impact a company’s financial health and creditworthiness. Credit risk officers use knowledge of industry-specific dynamics to manage credit risk for a portfolio of companies.

Cyclicality

Industries exhibit different cyclical patterns influenced by economic conditions. The graph shows the net upgrades minus downgrades within different industries. Red bars show more downgrades and green bars more upgrades.
- Even for these high-level industries, there are differences in the severity and timing of the downturn and upturn periods.
- Differences between more granular sectors can be even more pronounced.
Understanding where an industry is in its economic cycle helps credit risk teams assess the potential for deterioration or improvement for entities in that industry.
Some industries may be more sensitive to economic downturns, while others may be more resilient and some may even be counter-cyclical in nature.
Industry-specific factors form part of the rating process for determining the banks’ internal credit ratings.
Assigning an accurate industry code to an entity ensures portfolio reporting represents the correct risk.

Regulation

Banks’ internal ratings reflect industry-specific regulations which can vary widely and cause significant differences in credit risk trends and ratings.
Banks monitor compliance with industry-specific regulations and adjust their ratings accordingly, as changes in regulatory requirements can affect a company’s operations and financial performance.
Any failure to follow regulations could lead to legal and financial consequences, which has an impact on credit risk.

Levels of Competition

Different industries have their own market dynamics, with varying levels of competition, barriers to entry, and market concentration.
For example, the Utility Sector has high barriers to entry because of the important inherent cost and level of regulations.
Companies operating in highly competitive industries may face pressure on pricing and margins, affecting their credit risk.

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Assessing and Monitoring Credit Risk Across Industries

Given the diverse nature of credit risk factors impacting different industries, reviewing trends and relationships between industries is an important part of managing a portfolio.

In addition, industry consensus data can be used to calculate correlations between different industries and assess concentration risk.

The below examples highlight the types of analyses that can be used to manage the risk of a portfolio.

Entity Type

Entity Type categorises entities at the highest level, with the main Entity Types being Corporates, Financials, Sovereigns, and Funds. This analysis shows how Latin American Corporates and Financials started diverging at the start of August 2023.

Industry

This graph displays the range of behaviours of different Industries within Brazilian Corporates. Brazilian Basic Materials and Consumer Services deteriorated while Industrials and Oil & Gas entities improved between March 2023 and March 2024.

Super Sector

Financial entities can be further categorised into Banks, Financial Services, Insurance, and Real Estate. This plot shows the net upgrades minus downgrades for the various Super Sectors within Asian Financials. Asian Insurance has been the worst-performing segment over the 12-month period with an overwhelming majority of net downgrades.

Sector

There are over 50 Sectors in the Credit Benchmark Industry classification. This graph shows how Life and Nonlife UK Insurance sectors differ in rating distribution. UK Nonlife Insurance has a higher portion of high-yield entities and the specific portion of bb-, b-, and c-rated entities has increased over the last 6 months.

Sub Sector

Sub Sector is the most granular industry classification with over 130 categories. The notch movements analysis quickly highlights notch movements in ratings across segments. In North American Mining, the Sub Sectors General Mining and Gold Mining show differences. There were more 1-notch upgrades than downgrades in North American Gold Mining entities, showing that Gold Mining is improving in credit risk whereas the General mining Sub Sector shows more deteriorations.