Each month, in Taking the Pulse, we report State and Industry sector variations in default rate. The high-resolution database underlying WAIN Street’s Business Default Index affords us a unique opportunity to understand geographic and industry sector credit quality variations in greater detail.
The heat map below illustrates the variation in credit quality across industries and geographies. Each cell represents the credit quality of an industry and state. Green indicates the highest quality and red the lowest. Looking across a row, we can see how business credit performance varies within a state based on industry sector. And looking down a column we can see the variation in credit quality across states for each industry.
Neither the states nor the industries are presented in any “usual” order. They are ordered based on their default rate similarity. Hence, high default rate states such as IL, CA and NY appear close to each other as do low default rate states such as LA, SD and VA.
Across the top is a dendrogram. It connects industries with similar credit quality. In this map, “Other services” and “Leisure & hospitality” industries are connected. Understandable, as they both depend on small-ticket consumer spending. Industries further up the tree are less similar. In this heat map, Information and Mining industries are similar and most distinct from all other industries.
Understanding such granular variations in credit quality can help us better manage our credit portfolios across functions – marketing, pricing, policy and risk management. Going forward, WAIN Street will publish the Credit Quality Map every month as part of Taking the Pulse.
Update March 3, 2014. An enhanced version of the Credit Quality Map is described here.