The final way in which a bank's loan portfolio should be analyzed is through a breakdown of the types of lending activities the loans relate to.

This can be done at a high level by looking at the proportion of secured and unsecured loans on the bank's balance sheet.

However, further analysis should be carried out at a product level, since the risk of loss is not consistent across all loan types.

These are some of the broad categories that loans are often reported in on a bank's balance sheet. Broadly, credit risk increases as we go up the list. Some banks may also choose to separate out project finance, agriculture, or commodity financing due to the specific risk factors associated with these loans if they are significant for the bank.

In terms of risk profile, developed market sovereign debt, loans to governments, municipalities, and state-owned entities are considered the least risky due to the issuer's ability to influence fiscal and monetary policy, increasing their ability to repay.

Next, still at the low end of the risk spectrum, are residential mortgages with relatively low loss rates due to relatively stable collateral values and predictable borrower cash flows.

Next are corporate loans, where the credit risk is driven by the sector and the quality of the corporate's cash flows.

For corporate loans, they are often secured by the assets of the company.

Then we have commercial real estate loans, which are more risky than residential mortgages since cash flows of the business depend on the success of their operating activities, making them more uncertain, and the value of the property acting as collateral can be more volatile.

Loans to small and medium-sized enterprises, SMEs, tend to be more at risk from local economic conditions and have less stable cash flows than larger corporates, making these loans more risky.

The final type of corporate loan is asset-backed loans, where the bank has lent money only on the basis of the value of some form of collateral rather than the cash-generating abilities of the organization.

These loans tend to be made to companies that don't have strong and reliable cash-generating ability, and the risk around the loan is only managed through recovering value from collateral in the event of default, rather than trying to mitigate the risk of default in the first place.

Unsecured retail loans are the most risky type of loans since they have low recovery rates in the event of default, and the probability of default is highly sensitive to the economic cycle. Credit cards are the most risky type of unsecured retail loans since the borrowers tend to be younger, lower credit quality customers.

Also, since only minimum repayments have to be made each month, this can mask increases in the risk of default.

From an analysis perspective, understanding the risks associated with different types of loans can help to assess the impact of a change in loan portfolio composition on overall credit risk.