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Examining industries: The importance of industry analysis for financial institutions

Kate Randazzo
October 11, 2023
Read Time: 0 min

How industry analysis can improve your credit risk management

Understanding your customers' businesses leads to better loan pricing, structure, and risk management.

You might also like this webinar series, "Tackling common credit risk questions during challenging times."



Why is industry analysis important?

Industry analysis is critical for any business professional looking to stay competitive. Whether we’re using it to gauge the competition or track our own progress, we regularly monitor our own performance. For financial institutions, industry analysis must also include monitoring customers’ performance to gain new insights that enhance credit risk management.

Knowing your customers’ competitive landscape is useful for a myriad of reasons. Looking at how industries in your area perform allows you to see trends and assess potential market opportunities. If you’re considering expanding, or repositioning, your target client base, industry information is an extremely valuable tool to assess the health of different industries.

Let’s say you’re considering repositioning your financial institution to focus on a new industry niche, but don’t know which industries to target specifically. By gauging an industry’s health as a whole, you could decide that the restaurant market in your area has remained stagnant while the technology industry is booming. This gives you a starting point for advertising, networking, and reaching out to potential clients. By analyzing current industry trends, you could more confidently point your bank or credit union in a new direction and possibly save it from investing in a poor market.

In addition to being able to better target your prospective clients, industry information allows you to better help your current clients by assessing their specific industry’s health. Offering your clients deeper insight into their industry and new products to help them grow in it opens opportunities for engagement and increases the likelihood they’ll see you as a trusted advisor, rather than just a bank.

The right questions

Industry analysis method for financial institutions

When you ask someone what they analyze when considering their business, the majority of professionals would say their individual competitors, or their own performance over a given period of time. They gauge themselves in the marketplace by comparing their financials with peers in the same industry using different metrics that evaluate everything from COGS to Net Profit and ROI. Whatever the case, the same pattern usually follows suit; they use industry data to benchmark themselves against their own past performances, or someone else’s.
But how do you analyze an industry you are not familiar with? The following method for industry analysis was outlined in a recent Abrigo webinar. These questions and considerations can guide your financial institution to a better understanding of industry markets in your area.

Barriers to entry: Is this an industry that is easy to get in or out of? Are there high capital or technological costs? Are there many regulatory requirements? Industries with high barriers to entry can pose challenges for new businesses but make well-established businesses a more secure investment.

Intensity of competition: Are there one or two dominant players that control the market? Understand the landscape and what large and small businesses are making the most impact on the market to gauge the risk of banking the industry.

Power of suppliers: How much control do suppliers have over the business? Particularly since the pandemic, suppliers have faced unforeseen issues such as staffing or parts shortages that can severely impact margins.

Power of buyers: What power do the customer’s buyers hold? If the industry only has a few large buyers, for example, if the business mainly contracts with the government, they are subject to whatever offers those main buyers make and have little control over pricing.

Threat of substitute products: How likely is the product or service to be replaced? Technological advances boot out products over time—cars replacing horses, for example. Today, public policy can also determine which products are viable.

Political, economic, social, environmental, and technological factors: What external factors might influence the industry? Agricultural businesses are likely to have been impacted by all five of these factors in the last ten years—should those factors influence your credit risk pricing?

Obsolescence: What does the future of the product look like? In the past, technology has pushed older products into obsolescence, but today, delivery systems can also change the operations of many industries. Books are easier to buy online than in a store, for example, which may impact your decision to bank a new bookstore.

These questions can help your financial institution determine which industries are a good fit based on industry performance in your area and your unique risk appetite. 

View specific examples of industry analysis in practice in this webinar

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The long-term benefits of incorporating industry analysis

Industry analysis is not an academic exercise. You can make credit and risk rating considerations and structural decisions based on your findings. “At minimum, there should be some sort of analysis of the industry in your loan approval documentation,” said Kent Kirby, Director of Advisory Services at Abrigo. “Sometimes saying yes to a loan in a certain industry is not the right decision for the bank if you don’t understand or aren’t comfortable with the industry—even if it’s a good customer.”

Conditions change, so it is imperative that your financial institution stays vigilant when it comes to the markets it is involved in. If your bank or credit union has more than a 10% portfolio concentration in an industry, you need to know the industry inside and out. If conducting in-depth research into industries in your area is too much of an ask for your busy department, there are services that provide analysis, benchmarks, and risk rating tools that may be worth considering to strengthen your credit risk program.

The benefits of industry analysis are twofold. Keeping your clients current with industry trends and being a thought leader for your client is something unique that only you can offer and may pay dividends in the future. And exploring how your borrowers’ industry impacts your institution is key to a successful credit risk management program. If your financial institution is struggling to proactively identify credit risk in the portfolio, Abrigo can help.

Get more credit risk best practices. Read "Commercial risk rating considerations."

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About the Author

Kate Randazzo

Content Marketing Manager
Kate Randazzo is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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