C. Myblog

NEV: Do the Values Make Sense?

August 15, 2014

There is some debate regarding reasonable methodologies and approaches for loan discount rates for an NEV analysis. Discounting to the current offering rate, to a comparable asset-backed security rate and including a credit risk spread are just a few of the approaches that are debated.

Regardless of the assumptions approach, the values need to make sense. One way to check this is to compare the +300 value to the book value. A +300 value that is higher than the book value should raise a flag and could mean that the discount rate assumption may be too optimistic.

For example, consider a credit union that has an auto portfolio with a starting gain of 8%. In a +300 rate environment, the autos devalue 5% (autos usually devalue 4-6%). The economic value declined but the +300 value results in about a 3% premium over the book value.

This example indicates that the starting value is likely not reasonable. Most credit unions would not expect fixed-rate loans on their books today to be worth more if rates increase 300 basis points. As such, the discounting approach should be revisited to ensure reasonableness.

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