AERIS: a technology for better forecasting of financial statements

Chart 1)Credit Rating Forecast

Nikkei FTRI’s AERIS is an efficient and powerful tool for quickly predicting the content of future financial statements.

TOKYO, JAPAN, April 7, 2022 / — AERIS is an effective and powerful tool for predicting the content of future financial statements. It was first developed by the Nikkei Financial Technology Research Institute (or “Nikkei FTRI”) in June 2009.

The environment surrounding financial institutions has changed dramatically since the Global Financial Crisis (or “GFC”) that occurred towards the end of the first decade of this century. At that time, many of these organizations faced capital shortfalls due to the limited ability of traditional stress testing methods to assess capital adequacy. In the wake of the GFC, the Basel Committee on Banking Supervision (or “BCBS”) released its stress testing principles, which increased the value placed on stress testing. Since the GFC, international regulators have announced the introduction of various measures, including the use of risk appetite frameworks and forward-looking provisions, thereby drawing greater attention to stress testing in general.

Macroeconomic stress tests, which have been widely implemented by financial institutions, incorporate forecasts of future changes in the macroeconomic environment. In a typical macro stress test, future rating transition matrices are projected based on those of the past, and capital adequacy is assessed taking into account changes in the credit portfolio. However, this method can only capture changes in a credit portfolio as a whole and does not allow for detailed analyzes at the level of individual company credit fluctuations. Examination of the evolution of credit portfolios considered as collective sets remains important. However, since macroeconomic stress tests incorporate expected future changes in the macroeconomic environment, it is also necessary to use their results to formulate specific support measures for individual companies in response to changes in their credit conditions. unique.

While portfolio and individual company credit changes are vital checkpoints for financial institutions, many have not been able to develop rapid systems for mass financial statement forecasting. AERIS is a product that a number of financial institutions are using to solve this problem. AERIS provides financial statements for large, medium and small businesses that make up individual credit portfolios. It allows the user to instantly get a picture of the changing level of the credit portfolio while learning which companies have increased or decreased their credit rating.

AERIS builds financial statement forecasts using only three parameters derived from future macro stress scenarios. In addition, these resulting predictions themselves can also be used to estimate credit scores, and the system automatically calculates credit costs and Tier 1 Tier 1 capital ratios. AERIS gives users the ability to perform macro stress testing faster and more efficiently than ever before. In recent years, AERIS has been used not only for the above-mentioned tasks, but also for forward-looking allocation and measurement of climate change risks.

Chart 1 shows the evolution of the credit rating according to the forecast financial statements. The dotted lines indicate the upper and lower bounds of the credit scores predicted by the simulation, and the blue line signifies the most likely credit scores. Based on the magnitude of the projected movement in credit ratings, this type of chart can be used to support the activities of companies who are concerned about credit deterioration due to the COVID-19 disaster.

We invite you to try AERIS on your own loan portfolio. If you are interested, please contact us.

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Marianne R. Winn