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Significance of consistent and uniform financial spreading

Published on August 8, 2022 by Neha Poddar

Financial spreading refers to the process of analysing financial statements and presenting the information at a granular level for enhanced underwriting and risk assessment. For a typical bank, the process comprises collecting a client’s financial statements, translating the financials into a standardised template, computing financial ratios and using these ratios to generate a risk rating. This helps the bank make strategic business decisions and manage risk effectively.

However, the financial spreading and documentation processes have faced a number of challenges due to the multiple data sources and templates being used:

  • Inconsistent treatment due to portfolio/credit manager’spreferences – The quality of spreads can be improved significantly if their treatment is consistent. Spreading is the foundation of the portfolio-monitoring process. Consistency in treatment of line items is sometimes compromised when spreading across geographies and bank branches. To ensure an effective portfolio-monitoring function, it is imperative that a uniform methodology and set of guidelines be followed in terms of what kind of accounts should be spread; current periods should not just be re-spread versus prior-year periods.

  • Non-standardised financial statements – Financial statements or documents could be of poor quality, illegible or unsearchable. They may also vary from one corporate line to another. The focus should be on deriving operational benefits from scanned PDF documents and documents with images.

  • Longer turnaround time – A manual process is time-consuming, leading to longer turnaround time for calculating spreads and slow loan approval. Any output relating to spreads needs to be prioritised, resulting in faster conclusion on prospective clients, new-money, modifications and loan renewals.

  • One bank’s financials may differ from another’s and not always conform to GAAP – Spreading is an activity of transposing a borrower’s financials to the bank’s spreading tool, but such spreads may not always conform to GAAP. Different banks and FIs follow different conservative approaches and these may vary as follows:

  • Current assets such as pre-paids and amounts due from related parties are moved to non-current assets

  • Non-current liabilities such as loans from related parties are spread as current liabilities

  • Non-current assets may include current assets that are restricted

  • Lack of uniform procedures to analyse, collect and report – A detailed methodology document to streamline processes and generate consistent output is required to align these steps. However, formulating a centralised process to remove inconsistencies between geographies and bank branches remains an uphill task.

  • Multiple quality checks and reviews required to ensure accuracy and consistency – Spreading is a manual process, making it resource-intensive and prone to human error, which results in incorrect analysis. It is essential that financial statement spreading is accurate of high quality and meets the standards. This is a skill that comes with experience, but many banks assign this function to less experienced analysts.

These challenges impact a bank’s ability to accurately predict losses and proactively manage credit risks. Spreading warrants the same thoughtful input as underwriting and should not be treated as a mechanical process. Figures from the company-prepared statements or tax returns cannot always be transferred directly to the same line on the spreadsheet. The analyst or underwriter would need to think carefully about how ratios would be impacted when an item is spread differently from the accounting principles. They would also need to validate historical spreads data to make it consistent across the database.

Consistent and uniform financial spreading would lead to the below:

  • Faster turnaround time – reduces time taken for loan-related decisions

  • Operational consistency – removes subjectivity that could lead to different treatment of clients with similar profiles

  • Highly customisable – flexible for use according to different client requirements in terms of analysis

  • Increased productivity in credit underwriting – reduces operational burden on the credit analysis team

How Acuity Knowledge Partners can help

Banks need to reduce time spent on the process by digitally transforming the spreading platform. Our automated BEAT Aura extraction and spreading tool maximises benefits by redefining the commercial lending process. It helps research analysts automatically retrieve information from company filings and populate relevant data points in client-approved MS Excel models and templates. The process delivers significant gains in productivity and cost reduction, and guarantees a very high level of accuracy.

With two decades of experience in delivering research and analytics services to 420+ global financial institutions, we have built a strong franchise in the financial spreading process. We understand the nuances of different asset classes (C&I, Commercial Real Estate, Leveraged Lending, Asset Based Lending, Dealer Commercials), and are experienced in working with a range of spreading platforms.

To know more, please visit Financial Spreading Support | Centralized Spreading Platform | Acuity Knowledge Partners (acuitykp.com)



Sageworks Credit Analysis Software – Financial Spreading | Abrigo

Your Guide To Spreading Financial Statements – ELMENS

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About the Author

Neha Poddar has over 14 years of experience in working with leading global organizations in the banking and commercial lending domains. At Acuity Knowledge Partners, she has managed a large portfolio underwriting team for a mid-size US bank covering diverse industries. Her expertise spans a broad range of credit analysis, financial modelling, portfolio management and onshore client-facing roles. Neha holds a Ms. Finance degree from ICFAI university and a bachelor’s degree on Commerce.

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