FIG Modeling Test and have some questions
Hello all, I am currently interviewing for an ER position covering Financial Insitutions. They recently gave me a modeling test, and it is much more detailed than any other model I have worked on (probably not unusual considering that banks typically are more difficult to value and forecast than a tech or consumer company). I am not sure if I am overthinking it, and that they don't expect it to be completed perfectly but would rather get a feel for how I approach a model and my thought process. Does anyone have any resources or tips for FIG modeling? I have found some basic websites and tips online, but would love any additional help because I feel a bit stumped to be honest. How do I forecast LLR and charge-offs? How do I forecast loan growth without a deep analysis of various loan types (Municipals, Leasing, Construction etc.) and their macro drivers? How do I forecast Average other earnings assets? I tried it by myself and have determined an absurdly high EPS estimate, which I have attributed directly to my LLR estimate. Whenever I am having trouble I am typically just throwing a historical average in there (when appropriate). Let me know if yall have any thoughts or answers. I would additionally love to take a peek at older FIG models if peeps out there have them and are open to sending them my way. Any advice on how to forecast the effects of COVID on banks would also be appreciated.
Forecast allowance for loan losses (balance sheet item) as a % of average loans Forecast charge-offs as a % of average loans
Beg allowance for loan losses + LLR (P&L item) - this is a plug and what goes on the income statement - charge-offs = Ending allowance for loan losses (this is the number you forecasted in the first step)
For loan growth, if you want to keep it high level, start with historical growth by loan type and adjust based off of trends, macro drivers etc. (e.g., restaurants, hospitality, travel, C&R are highly impacted by covid). Lots of different approaches here up to you how much detail to go into. Banks themselves will likely preform regression analysis based off drivers at a micro product level.
DB (Matt O'Connor) has a really good banks primer - if you have access to research, look for a report called "Banking 101". Latest version may have been from 2017
Feel free to PM, I worked in FIG ER at a MM bank for the first 2 years of my career. It's been some time, but happy to share some advice on this
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