Question

Explain how a bank's loan portfolio plays to a bank's unique competitive advantages

Answer 1

Bank loan portfolio always provides with a competitive advantage against it's Peers. The risk exposures of different banks decides the quality of assets.

Loan portfolio of a bank is tested in tough times when the economy is on a downturn. In such troublesome scenario,if the borrowers are not likely to defualt , it is taken as a good sign that asset quality is sound.

The credit risks of different borrowers are to be estimated before lending any loan and the credit worthiness of different borrowers must be ascertained and risky loans must be lent against sound collateral.

A better bank has high asset quality and less likely to default in tough situations when the economy is the downturn. In such scenario, the primary focus is on the survival and a bank with best loans portfolio make the most of such situations as the competition gets too low as competitors are wiped out who have bad asset quality and substandard loan portfolio.

Such economic recession are best time for such banks to acquire more of the market share and grow bigger in size and have more competitive advantage. It is thus, always better to have a superior loan portfolio.