Giving Credit Its Due – v2

Our original post with the Credit Quality Map prompted a simple question: Could we also provide some information about the trend underlying each cell?  With arguably the most comprehensive database of business defaults at our disposal, the answer is “yes”.   We present below the Credit Quality Map with slight modifications to the coloring scheme and ordering the cells from high credit quality (green) to lower credit quality (red).

Credit Quality Map

For each cell in the map above,  we computed a diffusion index of the default rates of that cell over the previous 12 months–a single number that concisely summarizes the trend.  In the map below, green corresponds to the cell’s credit quality improving each month and red to the credit quality deteriorating each month.  Colors in-between represent the ratio of months of improvement and deterioration with yellow indicating that the value has changed equally in each direction.

Credit Quality Trend

With these two maps, we are now able to understand a segment’s current credit quality and also how it has trended over the last 12 months.  A powerful tool for managing credit portfolios.

Update March 31, 2014: A newer version of the map is available here.