Cde Monomotapa wrote:@GK I'll take a guess u r relying on mis-fortunes out of Triton...
NO well, that is a case that went wrong but those r such big ticket deals KCB deals with every other day most of which go well
TRUE so they go un-reported in the media
TRUE thus, risk is relative i.e on a %age of net business(loan book) just go through annual reports and u will find that KCB is probably among the principal banks. I bet u ur favorite stock banks with KCB
TRUE - So...do u expect ur favorite stock to have a reputation of a good or bad credit rating?
GOOD
My one and only argument is that diversification works well to deal with credit risk.
For portfolios of say 100b, if you have portfolio A with average 1b per loan, portfolio B with 100m per loan, C with 10m and D with 1m...
A is riskiest & D is least risky. That's a mathematical fact that has been proved in practice.
Other considerations such as administrative costs, which are highest for D & lowest for A need to be considered.
Also, portfolio D is likely to have the highest average lending rates. Portfolio A, with large corporates & high net worth individuals will be given the opportuinity to negotiate for lower rates.
Generally D is best for any bank... we just need to be careful not to go too low. If the bank proocesses loans of say 10k avg. admin costs will eat away any gains of diversification.
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