GarantiBank International: Capital Adequacy and Risk Management Report 2016

Transcription

1. 2016 Capital Adequacy & Risk Management Report GarantiBank International N.V.
2. Contents LI ST O F ABBREVIATIONS ................................................................................... 3 1. INT RO D UCT IO N ......................................................................................... 4 2. SC O PE O F AP P L IC AT IO N .......................................................................... 5 3. RI SK G O V E RN AN C E AT G BI ...................................................................... 5 4. RI SK AP P ET IT E FR AM EW O RK ................................................................... 6 5. O W N F UN D S ................................................................ .............................. 7 6. RE G UL AT O RY C AP IT AL R EQ U IR EM ENT S ................................................... 9 6. 1 C re dit R is k ........................................................................................ 11 6 . 1 . 1 E x p o s u re a m o u n t s B e f o r e C re d i t Ri s k Mi t i g a t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 6 . 1 . 2 Of f -B a l a n c e S h e e t E x p o s u r e A m o u n t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 6 . 1 . 3 Ge o g ra p h i c a l B r e a k d o wn o f t h e E x p o s u r e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 6 . 1 . 4 E f f e c t i v e M a t u ri t y B r e a k d o wn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 6 . 1 . 5 B re a k d o w n o f t h e E x p o s u re s b y S e c t o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 6 . 1 . 6 P a s t D u e a n d I mp a i re d E x p o s u re s , P ro vi s i o n s a n d V a l u e A d j u s t m e n t s .. 15 6 . 1 . 7 C o u n t e rp a rt y C r e d i t R i s k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 6 . 1. 8 Cr e d i t Ris k Mi t ig at i on ................................................................... 18 6. 2 Sc o pe of Ac c e pt a n c e f or F - IR B Ap pr oac h .............................................. 20 6 . 2 . 1 Ge n e ra l D e s c ri p t i o n o f t h e M o d e l s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 6 . 2 . 2 Go v e r n a n c e Fr a m e w o rk A ro u n d F - I RB M o d e l s a n d P ro c e s s e s . . . . . . . . . . . . . . . 2 0 6 . 2 . 3 C a l c u l a t i o n o f ri s k W e i g h t e d A s s e t s f o r F - I RB E x p o s u r e Cl a s s e s . . . . . . . . . . . 2 1 6 . 2 . 4 S p e c i a l i ze d L e n d i n g . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 6. 3 M a rk et R is k ....................................................................................... 23 6. 4 O pe r at i on al R is k ................................................................................ 23 7. IC AAP FR AM EW O R K ............................................................................... 24 7. 1 Cr ed i t R is k ......................................................................................... 25 7. 2 C onc e ntr at i o n Ris k .............................................................................. 25 7. 3 M ar k et R is k ........................................................................................ 25 7. 4 I nt er es t R at e R is k on t h e B ank i n g B ook ( IR RB B) ................................... 26 7. 5 O p er at i on a l R is k ................................................................................. 27 7. 6 R ep ut a ti o na l a n d Str a te g ic R is k s .......................................................... 29 7. 7 O t her R is k s ........................................................................................ 29 7. 8 C ap i ta l Pl a n ....................................................................................... 29 8. IL AAP F R AM EW O RK ................................................................................ 30 8. 1 L i qu i d it y R is k G o v er n a nc e ................................................................... 30 8. 2 L i qu i d it y R is k M o n it or i ng ..................................................................... 30 8. 3 Fu n di n g S tr at eg y ................................................................................ 31 8. 4 L i qu i d it y R is k Pr of i le ........................................................................... 32 9. RE G UL AT O RY M ET RI CS .......................................................................... 33 10 . REM UN E R AT IO N ..................................................................................... 34 10 . 1 G o v er n a nc e ...................................................................................... 34 10 . 2 Rem un er at i o n Co m m itte e ................................................................... 34 10 . 3 Inf or m at i o n on l in k bet we e n P a y a n d P e rf orm anc e ............................... 35 10 . 4 Q u an t it at i v e Inf or m atio n o n R em un era t i on ........................................... 35 GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 1
3. Annex A nn ex 1 - T i er 2 I ns tr u m ent M ai n Fe a tur es ....................................................... 37 A nn ex 2- O wn Fu n ds Dis c l os ur e ...................................................................... 39 A nn ex 3 - As s et Enc u m br anc e ......................................................................... 45 GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 2
4. LIST OF ABBREVIATIONS A &CCSB Audit & Compliance Committee of the Supervisory Board ICAAP Internal Capital Adequacy Assessment Process ALCO Asset & Liability Committee ICU Internal Control Unit AVA Additional Valuation Adjustment ILAAP Internal Liquidity Adequacy Assessment Process BIA Basic Indicator Approach IRB Internal Ratings Based CCF Credit Conversion Factor IRRBB Interest Rate Risk on the Banking Book CCR Counterparty Credit Risk IRS Interest Rate Swap CC Credit Committee ISD Information Security Department CD Credits Division ISDA International Swaps and Derivatives Association CDS Credit Default Swap ITP Internal Transfer Pricing CET1 Common Equity Tier 1 LCD Legal & Compliance Department CIS Commonwealth of Independent States LCR Liquidity Coverage Ratio COBIT Control Objectives for Information and Related Technology LGD Loss Given Default CRD Capital Requirements Directive MB Managing Board CRR Capital Requirements Regulation MO Middle Office CSA Credit Support Annex NSFR Net Stable Funding Ratio DNB De Nederlandsche Bank PD Probability of Default EAD Exposure at Default RCAP Regulatory Capital EaR Earnings at Risk RCSB Risk Committee of the Supervisory Board EBA European Banking Authority RMD Risk Management Department ECAP Economic Capital ROE Return on Equity EDTF Enhanced Disclosure Task Force RWA Risk Weighted Assets EVE Economic Value of Equity SA Standardised Approach F-IRB Foundation Internal Ratings Based SB Supervisory Board FIRM Financial Institutions Risk Analysis Method SFT FRA Forward Rate Agreement SMA FSA Financial Supervision Act SSC Supervisory Slotting Criteria GMRA Global Master Repurchase Agreement VaR Value at Risk IAD Internal Audit Department IAC Identity Access Control Securities lending or borrowing transactions Standardised Measurement Approach GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 3
5. 1 . INTRODUCTION Financial institutions have to fulfil several disclosure requirements as per Part Eight of the Capital Requirements Regulation (CRR). The aim is to make information available to the public related to solvency, liquidity and the risk profile of the institution as a whole, and to enhance the consistency and comparability of provided information among banks. This document contains the Pillar III disclosures of GarantiBank International N.V. (hereafter referred to as “GBI”) as of 31 December 2016 and should be read in conjunction with the Annual Report of GBI. The table below is provided in order to reference the information provided in this report and GBI’s Annual Report, compared to requirements in the related articles in Part Eight of CRR. DISCLOSURE REQUIREMENTS PURSUANT TO PART EIGHT OF THE CRR Reference TITLE II: TECHNICAL CRITERIA ON TRANSPARENCY AND DISCLOSURE Article 435 Risk management objectives and policies See sections 3 and 4 Article 436 Scope of application See section 2 Article 437 Own funds See section 5 Article 438 Capital requirements See section 6 Article 439 Exposure to counterparty credit risk See section 6.1.7 Article 440 Capital buffers See section 9 Article 441 Indicators of global systemic importance Not applicable Article 442 Credit risk adjustments See section 6.1.6 Article 443 Unencumbered assets See Annex 3 Article 444 Use of ECAIs Not applicable Article 445 Exposure to market risk See sections 6.3 and 7.3 Article 446 Operational risk See sections 6.4 and 7.5 Article 447 Exposures in equities not included in the trading book Not applicable Article 448 Exposure to interest rate risk on positions not included in the trading book See section 7.4 Article 449 Exposure to securitisation positions Not applicable Article 450 Remuneration policy See section 10 Article 451 Leverage See section 9 TITLE III: QUALIFYING REQUIREMENTS FOR THE USE OF PARTICULAR INSTRUMENTS OR METHODOLOGIES Article 452 Use of the IRB Approach to credit risk See section 6 Article 453 Use of credit risk mitigation techniques See section 6.1.8 Article 454 Use of the advanced measurement approached to operational risk Not applicable Article 455 Use of internal market risk models Not applicable GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 4
6. 2 . SCOPE OF APPLICATION The scope of application of the Pillar III requirements is confined to GBI and its branch. The information disclosed in this document is not subject to an external audit, but is verified and approved independently within GBI. Differences can be found between the figures presented in this report and the figures in the Annual Report of GBI. This is mainly due to application of F-IRB approach and the figures in this report, unless otherwise stated, refer to Exposure at Default (EAD) whereas the figures presented in annual report are in line with GBI’s accounting framework. 3. RISK GOVERNANCE AT GBI The risk management culture at GBI has been established as a key element of the Bank’s strategy, with an emphasis on risk awareness at all levels of the organization. GBI has established an adequate segregation of duties and responsibilities enabling overall control of business operations. Risk management is structured under various levels within the organization. These levels are composed of committees at the Supervisory Board Level, committees at the Bank level and in the form of separate risk and control division and departments. The committees which form the backbone of risk governance at GBI are established as per the segregation of duties principle, and supported by the related divisions and departments that have explicit risk management responsibilities as specified below. The Supervisory Board bears the overall responsibility for approving the risk appetite of GBI. The Risk Committee of the Supervisory Board (RCSB) advises the Supervisory Board on the Bank’s risk appetite and ensures that effective risk management is conducted accordingly. The Audit and Compliance Committee of the Supervisory Board (ACSB) is the ultimate authority in independent audit functions, compliance-related risks, and the statutory financial reporting process. The Managing Board (MB) of GBI functions as a collegial body, as referred to in Section 2:129 of the Dutch Civil Code. The MB is responsible for the management, general affairs, and business connected with GBI. The MB develops strategies, policies, and procedures to establish effective risk management and ensure that the Bank is in line with the approved risk appetite. The Risk Management Committee (RMC) is responsible at the Bank level for coordinating and monitoring risk management activities, reporting directly to the RCSB. Other committees at the Bank level manage specific key banking risks: the Credit Committee (s) for credit risk; the Asset and Liability Committee (ALCO) for market, interest rate, and liquidity risks; and the Compliance Committee for compliance risks. The New Product Development Committee is responsible for the assessment and introduction of new products and services. The Credit Division has a separate risk control function, independent of commercial activities, making certain the proper functioning of the Bank’s credit processes and ensuring that the composition and the diversification of the loan portfolio are in line with the lending strategy of the Bank. The Risk Management Department (RMD) of GBI has an independent risk monitoring function, also independent of commercial activities. RMD is responsible for the quantification and monitoring of the material risks in terms of economic capital, regulatory capital and liquidity in order to limit the impact of potential events on the financial performance of the Bank. RMD develops and implements risk policies, procedures, methodologies and infrastructures that are consistent with the regulatory requirements and best market practices. Risks in relation to the limits established by the Bank are continuously measured and comprehensively reported to the appropriate committees. RMD also coordinates all efforts for GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 5
7. compliance of the Bank ’s risk management policies and practices with CRD, CRR, Basel principles and the Financial Supervision Act (FSA, Wet op het financieel toezicht / Wft). The Internal Control Unit (ICU), under RMD, is involved in the monitoring and reporting of operational risks and establishing preventive control processes. The Legal and Compliance Department (LCD) is also an independent body, reporting directly to the ACSB as well as to the Managing Board and Compliance Committee. The Legal function advises on relevant legal issues while the Compliance function translates compliance-related rules, laws and regulations into internal compliance obligations and policies . Information Security Department (ISD) is responsible for identifying risks in the information technology systems and processes at GBI, as well as for ensuring that technology-related threats to the business continuity are identified and mitigated. Identity Access Control (IAC) department manages access to information and applications scattered across internal and external application systems. The Internal Audit Department (IAD) monitors the governance frameworks around all risks through regular audits, and provides reports to the Managing Board and the ACSB. 4. RISK APPETITE FRAMEWORK GBI’s Risk Appetite Framework (RAF) consists of three layers. The first layer is the Principles of Risk Appetite, which identifies relevant governance bodies and defines risk metrics around the Bank’s risk appetite. The second layer is the Risk Appetite Statement (RAS), which determines the risks (and their level) that the Bank is prepared to assume in order to achieve its business objectives. The final layer is the Limit Framework, which supports the risk appetite and ensures that core metrics defined under risk appetite, are met at all times according to risk type. GBI’s core metrics consist of several risk indicators for solvency, liquidity and recurrent income. In determining risk appetite, the Supervisory Board seeks a balanced combination of risk and return while paying close attention to the interests of all stakeholders. As such, it reviews it on an annual basis at minimum.  GBI’s solvency has always remained at an above-adequate level owing to its committed shareholders and risk-averse strategies. The Bank aims to hold a strong capital base with a high Tier 1 component.  The Bank pays specific attention to ensure sufficient liquidity and thus safe banking operations and sound financial conditions in both normal and stressed financial environments, while retaining a stable and diversified liquidity profile.  In terms of financial performance, the Bank targets a return on equity level that is stable in the long-term and satisfies the stakeholders, including the shareholders, while maintaining core competencies and a strategic position in key markets.  GBI is strongly committed to act with integrity and adhere to the highest ethical principles in its business conduct. The Bank avoids all sorts of transactions and activities, which might lead to an insufficient compliance with internal policies or external regulations and, which may generate reputational risk in the eyes of all stakeholders, including regulators, shareholders, clients and society. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 6
8. The core metrics are supported by additional metrics under the Limit Framework , which sets limits on specific risk types by means of introducing credit, market, structural interest rate, structural FX, liquidity, operational and reputational risk indicators. The RAF was created to support the Bank’s core values and strategic objectives. Accordingly, GBI dedicates sufficient resources to ensure full compliance with all requirements as well as to establish and maintain a strong risk culture throughout the organization. Evaluation, monitoring and reporting is an important element of GBI’s RAF, which allows the Bank to ensure the compliance with the Risk Appetite set by the Supervisory Board. The Bank’s risk limits are continuously monitored through control functions, while the core metrics are monitored by the Supervisory Board at each meeting. 5. OWN FUNDS GBI’s capital base consists of two parts: Tier 1 and Tier 2 capital. Tier 1 capital is made up of Common Equity Tier 1 (CET1) and additional Tier 1. The CET1 capital of GBI consists of fully paid-in 1 capital, other reserves and retained earnings including current year profit . GBI’s Tier 1 is equal to its CET1 as there are no other hybrid capital products which could qualify as additional Tier 1 capital. There are various deductions from CET1 capital, based on the CRR. Intangible assets net of tax liabilities are deducted in full from CET1 capital (Article 36 of CRR). An additional valuation adjustment (AVA) is made on fair valued assets and liabilities, affecting CET1 capital (Article 34 of CRR). Lastly, if expected loss of performing exposures exceeds general provisions, 80%2 of the shortfall is deducted from CET1 capital. In GBI’s case, there is a shortfall of general provisions compared to performing exposures, resulting in a proportional deduction from CET1 capital. Tier 2 capital of GBI consists of subordinated loan. Tier 2 capital instruments are subject to gradual amortization in case the remaining maturity of the debt falls below five years. No amortization is applied on the Tier 2 capital of GBI as the remaining maturity of the instrument is higher than five years. The main features of the Tier 2 instruments are provided in Annex 1. There are also further deductions from Tier 2 capital. The remaining 20% of the shortfall of general provisions, is deducted from Tier 2 capital. On the other hand, the excess of specific provisions over impaired exposures is added back to Tier 23. Additionally, any excess holdings of own funds instruments of other financial institutions above 10% of the Bank’s own CET1 capital is deducted from the respective level of own funds. In GBI’s case, holdings of Tier 2 instruments are below the threshold, thus no deduction from Tier 2 is necessary. 1 Pursuant to Article 26(2) of Regulation 575/2013 of the European Parliament and of the Council and, to Decision 2015/656 of the European Central Bank (ECB/2015/4), interim or year-end profits may only be added to CET1 after receiving the approval of competent authority, ECB.. 2 CRR changed the treatment of the ‘expected loss shortfall’; previously, this difference, if negative, was deducted 50%-50% from Tier 1 and Tier 2 capital. As per the CRR (Article 36.1.d), the difference must be fully deducted from Common Equity Tier 1. However, this change is phased in until 2018 (Article 469.1.a of CRR, and Article 5.5.1 of DNB CRD IV and CRR Specific Provisions Regulation), with a 80%-20% deduction in 2016. 3 Excess of specific provisions is added to Tier 2, as per Article 62 of the CRR GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 7
9. Please find below an overview of GBI ’s own funds composition as of 31.12.2016. Table 5-1 (EUR 1,000) 31/12/2016 31.12.2015 Change 136,836 136,836 0 CET1 Paid-in and called-up capital 9,796 9,413 383 Other reserves 409,191 397,850 11,341 IRB provision shortfall -12,524 -10,931 -1,593 -3,373 -3,631 258 -57 -65 8 TOTAL CET1 539,869 529,472 10,397 TOTAL Tier 1 539,869 529,472 10,397 31.12.2016 31.12.2015 Change Subordinated debt 50,000 80,000 -30,000 IRB provision excess 10,390 15,949 -5,559 IRB provision shortfall -3,131 -4,685 1,554 0 -556 556 57,259 90,708 -33,449 597,128 620,180 -23,051 Retained earnings Deduction of intangible fixed assets AVA (EUR 1,000) Tier 2 4 Other deductions TOTAL Tier 2 TOTAL Own Funds Total own funds of GBI decreased by 4% in 2016 mainly due to the decrease in Tier 2. GBI recorded a net profit of EUR 16.4million in 2016, EUR 9.8 million is included in own funds taking into account the latest audited net profit until and including 30 June 2016, in line with the reports submitted to De Nederlandsche Bank (DNB).The relationship between GBI’s Own Funds and accounting capital is shown in the table below. Table 5-2 (EUR 1,000) Paid-in and called-up capital Revaluation reserves Other reserves Profit current year Shareholders' equity (Accounting Capital) 31.12.2016 of which is eligible as CET1 136,836 136,836 1,958 0 409,191 409,191 16,412 9,796 564,397 555,823 IRB provision shortfall - 80% Deduction of intangible fixed assets AVA -12,524 -3,373 -57 Total CET1 capital 539,869 Total Tier 1 capital 539,869 Total Tier 2 capital 57,259 Total Own Funds 597,128 4 Includes holdings of T2 instruments of other credit and financial institutions over the threshold of 10% of the Bank’s own CET1 capital GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 8
10. 6 . REGULATORY CAPITAL REQUIREMENTS Total of Tier 1 and Tier 2 capital should correspond to at least 8% of the Banks’ risk weighted assets, of which Tier 1 capital must constitute at least 6%. GBI applies the Foundation Internal Ratings Based (F-IRB) Approach for credit risk of Corporate, Institution and Sovereign portfolios since 1 January 2008 based on the permission obtained from DNB. Exposures related with Retail and Private Banking, as well as counterparties in other asset classes which cannot be rated by any of the internal rating models, are subject to permanent exemption from F-IRB and are treated under the Standardised Approach (SA). GBI uses the Standardised Measurement Approach (SMA) for market risk and the Basic Indicator Approach (BIA) for operational risk in the calculation of the minimum level of required capital. In the table below, an overview of the capital requirement and gross credit risk exposure on 31.12.2016 is presented. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 9
11. Table 6-1 (EUR 1,000) 31.12.2016 Gross Capital Exposure Req. 31.12.2015 Gross Capital Exposure Req. Change Gross Capital Exposure Req. Credit Risk F-IRB approach: Central Gov. & Central Banks5 Institutions6 Corporates Corporates (Specialised Lending) Equity 5,162,438 241,346 5,267,192 242,501 -104,754 -1,155 651,380 956,404 3,028,511 358,079 4,621 7,667 58,984 152,625 14,037 1,368 814,330 1,236,846 2,636,919 370,920 4,477 7,499 83,600 132,406 14,820 1,325 Total F-IRB approach 4,998,995 234,681 5,059,015 238,325 -162,950 -280,442 396,069 -12,841 144 -60,020 168 -24,616 21,544 -783 43 -3,644 Total Standardised approach 12,934 115,105 12,447 22,957 163,443 495 3,993 341 1,836 6,665 18,066 157,238 12,219 20,654 208,177 698 1,257 569 1,652 4,176 -5,132 -42,133 228 2,303 -44,734 -203 2,736 -228 184 2,489 Counterparty Credit Risk (CCR) 272,283 3,179 452,384 3,947 -180,101 -768 92,683 127,561 28,616 154 249,014 858 1,684 11 2,553 189,631 191,392 15,848 168 397,039 1,230 884 15 2,129 -96,948 -63,831 12,768 -14 -148,025 -372 800 -4 424 15,560 4,156 3,553 23,269 334 26 266 626 7,019 45,451 2,875 55,345 232 1,553 33 1,818 8,541 -41,295 678 -32,076 102 -1,527 233 -1,192 5,434,721 244,525 5,719,576 246,448 -284,855 -1,923 Standardised approach: Institutions Corporates Retail Equity Other non-credit-obligation assets F-IRB approach: Central Gov. & Central Banks7 Institutions Corporates Corporates (Specialised Lending) Total F-IRB approach Standardised approach: Institutions Corporates Retail Total Standardised approach Total Credit Risk & CCR Credit Valuation Adjustment (CVA) 527 572 -45 Total Market Risk (SMA) 360 48 313 13,253 13,503 -250 258,666 260,571 -1,905 Total RWA 3,233,326 3,257,140 -23,814 CET1 Ratio 16.70% 16.26% 0.44% Total Capital Ratio 18.47% 19.04% -0.57% Total Operational Risk (BIA) Total Capital Requirement 5 As per Article 150 of the CRR, sovereign exposures of EUR 550 mio (2015: EUR 716 mio) are treated under SA and being exposures to EU member states, receive a 0% risk weight. However, these are classified under IRB in this table with the rest of the sovereign asset class. 6 Throughout this document, “Institutions” consist of credit institutions as defined under Article 4(1) of the CRR, and includes both institutions established in the EU, and in third countries. 7 As per DNB’s national discretion sovereign exposures of EUR 93 mio (2015: EUR 190 mio) which satisfy the 0% risk weight condition are classified under IRB in this table GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 10
12. The capital requirement under Pillar 1 is EUR 258 .7 million. The largest part (95%) of the capital requirement relates to credit risk 8. 97% of the credit risk weighted assets are treated under F-IRB approach. Common Equity Tier 1 (CET1) has increased to 16.70% from 16.26% in 2016, due to the decrease in the loan book. The total capital ratio has decreased to 18.47% from 19.04% because of the early repayment of Tier 2 capital. 6.1. Credit Risk Credit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the institution or otherwise fail to perform as agreed. At GBI, credit risk arises mainly from trade and commodity finance, structured finance and treasury activities. GBI is mainly involved in low default portfolios such as sovereigns, banks, large corporate companies and trade finance activities. Within the credit risk framework of GBI, the counterparties are classified as per their characteristics and subsequently specific processes are applied to effectively cope with credit risks. All business flows implying credit risk pass through the CD from where they are subdivided into separate teams responsible for assessing and managing credit risks pertinent to corporate counterparties, financial institutions and sovereigns. The aggregation of business flows in the CD allows adequate evaluation of the global balance of risks and exposures. The risk assessment approaches for different types of counterparties within the above mentioned subdivisions are different and adjusted to the specific properties of each subdivision type (e.g. financial institutions, non-bank financial institutions, commodity trading companies, corporates etc.) and to the variety of transactions typically handled (e.g. trade finance, shipping finance, treasury, private banking etc.). Being an F-IRB Bank, GBI has dedicated internal rating models to evaluate the creditworthiness of counterparties. The rating models are integrated in the credit decision making and monitoring processes. Credit rating models serve as a basis for the calculation of regulatory capital and economic capital that GBI has to maintain to cover expected and unexpected losses from its lending activities. Ratings are also integral parts of pricing and risk based performance measurement processes. All rating models are validated by independent third party experts on an annual basis. IAD also reviews the use of the models and the data quality. The Credit Committee of GBI is responsible for the control of all credit and concentration risks arising from the banking and trading books in line with the Bank’s risk appetite. The Wholesale Credit Risk Policy establishes the Bank’s decision-making process in granting credit limits, setting rules and guidelines for exposures that give rise to credit risk. In view of the internal ratings and credit assessment analyses of the obligors, the Credit Committee assigns the credit exposure limit. All obligors have individual credit limits based on their creditworthiness. Groups of connected obligors are subject to regulatory ‘group exposure’ limits, as well as internal Group Concentration Policy, to effectively manage the concentration risk of the Bank. Furthermore, as per the Country Limit Policy, limits are in place that cap the maximum exposure to specific countries, to ensure that related risks do not threaten the asset quality or solvency of the Bank. Finally, the Sector Limit Policy is designed to minimize contagion risks. The effectiveness of risk monitoring is supported by internal systems ensuring proper compliance with the principle of segregation of duties and authorization levels. Every transaction under approved credit limits requires a number of authorizations and controls prior to execution and cannot be finalized without those processes. Under this structure, every commercial initiative goes through multiple checks and is inputted in the operating system by authorized 8 Including counterparty credit risk GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 11
13. personnel who are functionally separated from the personnel with commercial targets . Regular monitoring of GBI’s exposure and compliance with the established credit limits ensures timely management of credit risk. The exposures to various customers, business lines and geographical locations are monitored on a daily basis by assigned relationship managers and credit officers, while compliance with the established limits is controlled by CD that provides independent judgement. The credit follow-up process is divided into two main parts; follow-up of the customer and follow-up of the credit facility itself. The follow-up of the customer is associated with the credit risk, whereas followup of the credit facility (e.g. documentation) is related to credit risk mitigation and operational risk. The credit facility follow-up is a dynamic process and is categorized as; performing, watch list, impaired, provisioned and write-off stages. All shifts within those categories either in the direction of downgrading or upgrading, require the approval of related credit committee. A loan may be shifted to the watch list based on the events outlaid in pre-defined warning signals. The internal information system of GBI offers great possibility in delivering information on a regular and ad-hoc basis and allows producing a variety of regular reports that comprise all exposures and concentrations by, among others, geographical location, sector, and borrower. 6.1.1. Exposure amounts Before Credit Risk Mitigation The total credit exposure, including on balance sheet exposure, off balance sheet liabilities and counterparty credit risk exposure, after provisions and before credit risk mitigation is as follows: Table 6.1.1 Average Exposure 2016 Q4-2016 Q3-2016 Q2-2016 Q1-2016 720,099 744,063 673,653 655,052 807,628 Institutions 1,286,421 1,112,459 1,111,499 1,343,494 1,578,231 Corporate 3,508,367 3,534,621 3,470,421 3,628,683 3,399,743 Retail 13,173 16,001 14,727 11,348 10,618 Equity 4,406 4,621 4,337 4,384 4,281 22,019 22,957 21,398 21,720 22,000 5,554,485 5,434,722 5,296,034 5,664,682 5,822,501 (EUR 1,000) Central Gov. & Central Banks Other non-credit-obligation assets Total Total Exposure GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 12
14. 6 .1.2. Off-Balance Sheet Exposure Amounts The off-balance sheet exposures are broken down to the transaction types shown in the table below. For regulatory capital calculations, the exposure values of off-balance sheet items are determined by multiplying the notional amounts with a Credit Conversion Factor (CCF), based on a regulatory ‘risk classification’. The increase in total off-balance sheet exposure compared to 2015 is mainly driven by the increase in letter of credits. Table 6.1.2-1 (EUR 1,000) Guarantees 100% 75% 20% 0% Irrevocable letters of credit 100% 75% 20% 0% Other commitments 100% 75% 20% 0% Total 6.1.3. 31.12.2016 49,869 49,869 206,280 206,280 142,612 19,274 123,046 293 398,761 31.12.2015 77,279 77,279 95,405 95,405 144,891 49,593 95,066 232 317,575 Difference -27,410 -27,410 0 0 0 110,874 0 0 110,874 0 -2,279 -30,319 27,979 0 61 81,185 Geographical Breakdown of the Exposures 9 The following table gives an overview of the geographical breakdown of gross exposure by material exposure classes based on customer residence. The share of gross exposures in CIS countries has decreased compared to 2015, shifting towards other European countries. Table 6.1.3 The Netherlands Other Europe Turkey CIS countries Rest of the World Total 31.12.2016 Central Gov. & Central Banks Institutions Corporates Retail Equity Other non credit-obligation assets Total Percentage of total 521,208 111,793 515,333 766 22,655 1,171,755 21.56% 131,200 259,100 1,476,500 478 4,621 302 1,872,201 34.45% 91,655 588,285 1,128,277 14,757 1,822,974 33.54% 36,716 1,988 38,704 0.71% 116,566 412,522 529,088 9.74% 744,063 1,112,460 3,534,620 16,001 4,621 22,957 5,434,721 100.00% 31.12.2015 Central Gov. & Central Banks Institutions Corporates Retail Equity Other non credit-obligation assets Total Percentage of total 735,731 146,341 269,038 2,587 20,453 1,174,150 20.53% 179,519 389,157 1,384,913 1,365 4,477 201 1,959,633 34.26% 88,712 751,204 1,142,797 9,916 1,992,629 34.84% 116,774 87,502 1,224 205,500 3.59% 49,846 337,817 1 387,664 6.78% 1,003,962 1,453,322 3,222,067 15,093 4,477 20,654 5,719,576 100.00% (EUR 1,000) 9 The geographical breakdown of assets and off-balance sheet liabilities is also provided in Section 33.1.a of GBI’s “Annual Report 2016”. Nevertheless, the figures in annual report do not include cash held at the central bank, non-credit obligations together with the counterparty credit risk. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 13
15. 6 .1.4. Effective Maturity Breakdown GBI mainly enters into transactions with short maturities as a result of its business model. The vast majority of the exposures are with residual maturity less than one year. The effective maturity breakdown of gross exposure based on exposure classes is as follows: Table 6.1.4 (EUR 1,000) 31.12.2016 Central Gov. & Central Banks Institutions Corporates Retail Equity Other non credit-obligation assets Total Percentage of total (EUR 1,000) 31.12.2015 Central Gov. & Central Banks Institutions Corporates Retail Equity Other non credit-obligation assets Total Percentage of total < 3 Months <6 Months < 1 Year <2 Years <3 Years <= 5 Years Total 441,984 - 9 - 9,480 292,590 744,063 215,112 230,514 248,372 61,655 94,058 262,749 1,112,460 1,070,991 357,146 675,098 439,215 458,052 529,497 3,534,620 5,819 - 1,276 - 7,710 - 13 - 85 - 1,098 4,621 16,001 4,621 - - - - - 22,957 22,957 1,738,528 588,936 931,189 500,883 561,675 1,113,512 5,434,721 31.99% 10.84% 17.13% 9.22% 10.33% 20.49% 100.00% < 3 Months <6 Months < 1 Year <2 Years <3 Years <= 5 Years Total 521,524 - - - 189,631 292,805 1,003,960 406,478 121,842 359,706 39,508 33,124 492,663 1,453,321 1,346,458 310,321 783,102 344,575 218,267 219,346 3,222,068 9,020 1,279 875 1,564 1,019 1,338 15,095 - - - - - 4,477 4,477 - - - - - 20,654 20,654 2,283,479 39.92% 433,442 7.58% 1,143,683 20.00% 385,647 6.74% 442,041 7.73% 1,031,283 18.03% 5,719,576 100.00% 60.0% of the total credit exposures have effective maturity of lower than one year compared to 67.5% in 2015. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 14
16. 6 .1.5. Breakdown of the Exposures by Sector The breakdown of gross exposure 10 by sector and exposure class is as follows: Table 6.1.5 (EUR 1,000) Central Gov. & Central Banks Institutions Corporates Financial services Oil & Gas Basic materials Transport & logistics Chemicals Consumer products Construction Food, beverages and Tobacco Agriculture Wholesale Utilities Telecom Services Leisure and Tourism Other Retail Equity Other non-credit obligation assets Total 6.1.6. 31.12.2016 31.12.2015 Total Total Total % of Total 744,063 13.69% 1,003,961 17.55% 1,112,459 20.47% 1,453,322 25.41% 3,530,463 668,293 497,800 471,471 442,792 292,904 252,819 239,048 170,030 169,708 98,568 80,406 43,747 9,811 17,185 75,880 20,150 64.96% 12.30% 9.16% 8.68% 8.15% 5.39% 4.65% 4.40% 3.13% 3.12% 1.81% 1.48% 0.80% 0.18% 0.32% 1.40% 0.37% 3,222,055 766,261 417,699 453,958 448,498 258,152 154,853 122,718 125,217 147,833 47,558 14,463 56,239 4,046 19,963 184,596 15,107 56.33% 13.40% 7.30% 7.94% 7.84% 4.51% 2.71% 2.15% 2.19% 2.58% 0.83% 0.25% 0.98% 0.07% 0.35% 3.23% 0.26% 4,621 0.09% 4,477 0.08% 22,966 0.42% 20,654 0.36% 5,434,722 100.00% 5,719,575 100.00% Past Due and Impaired Exposures, Provisions and Value Adjustments A loan is recognized as impaired if there is an objective evidence of impairment. This evidence could be given by, but is not limited to, the events listed below: - It is probable that the borrower will enter bankruptcy or other financial reorganization. The debtor has payment defaults against third parties; customers, banks, employees, etc. The debtor has been in arrears for at least 90 days with regard to repayment of principal and/or interest. Observable data indicates that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets. A breach of contract, such as a default or delinquency in interest or principal payments Significant financial difficulty of the issuer or obligor. The disappearance of an active market for that financial asset because of financial difficulties. For impaired loans, GBI attempts to ensure recovery by restructuring, obtaining additional collateral and/or proceeding with legal actions. Provisions are established by the Credit Committee, for the outstanding amount of the defaulted credit facility after deduction of expected recoveries and/or liquidation value of the collaterals. The impaired credit facility is further proposed for write-off after all 10 Breakdown by sector for loans and advances is also provided in Section 33.1.c of GBI’s ”Annual Report 2016”. However, the table above includes all exposures subject to credit risk calculation, thus also including cash, exposures to banks, interest-bearing securities, off-balance sheet exposures and counterparty credit risk. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 15
17. possible means of recovery have been exhausted . Below table provides information on the impaired loans and provisions by exposure class: Table 6.1.6-1 (EUR 1,000) Corporates Retail Total Loan Loss Reserve Ratio 31.12.2016 11 Impairment 62,377 205 62,583 Provisions 44,429 205 44,634 31.12.2015 11 Impairment 131,511 245 131,756 71.3% Provisions 77,591 245 77,836 59.1% The Bank has prudently increased the loan loss provisions as a result of the slowdown in commodity markets. The ratio is at the 71.3% level, which is higher than 59.1% in 2015. The table below gives an overview of the impaired and past due exposures and the provisions set aside by the residence of the counterparty: Table 6.1.6-2 (EUR 1,000) 31.12.2016 The Netherlands Other Europe CIS countries Rest of the world Turkey Total 31.12.2015 The Netherlands Other Europe CIS countries Rest of the world Turkey Total Impaired 11 Exposures More than 90 days past due Provisions for Impairment 1,450 52,886 6,320 1,926 7,657 51 38,310 5,058 1,215 62,583 7,657 44,634 1,413 57,532 34,934 35,305 2,572 61 26,249 24,583 24,479 2,464 131,756 77,836 An exposure is past due if a debtor has failed to make a payment of principal and/or interest when contractually due. The actual value adjustments in the preceding periods for each exposure class are as follows: Table 6.1.6-3 (EUR 1,000) Position as of 1 January Additions Write-offs Releases Exchange rate differences Position as of 31 December 31.12.2016 31.12.2015 77,836 29,368 (61,983) (1,377) 790 61,229 50,860 -39,099 -2,234 7,080 44,634 77,836 The net provision for loan losses decreased to EUR 44.6 million from EUR 77.8 million. 11 Impaired exposures after deduction of financial collaterals and including the noncash exposures to the impaired customers. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 16
18. 6 .1.7. Counterparty Credit Risk The exposure value of the counterparty credit risk is calculated according to Part Three, Title II, Chapter 6, section 3 of the CRR. Establishment of a credit limit for counterparty credit risk includes, but is not limited to, for the products below: - Spot and forward foreign exchange (FX) transactions - Currency transactions including currency swaps - Options - Forward rate agreement (FRA) - Interest rate swaps (IRS) - Credit default swaps (CDS) - Securities lending or borrowing transactions (SFTs) Wrong-way risk refers to the risk that exposure to the counterparty is positively correlated to the counterparty’s probability of default. GBI does not have exposure to such specific wrong-way risk. Derivatives transactions with professional market participants are subject to the Credit Support Annex (CSA) of the International Swaps and Derivatives Association (ISDA) derivatives agreements. Therefore the Bank could be in a position to provide or require additional collateral as a result of fluctuations in the market value of derivatives. The amount of collateral provided under these agreements is disclosed under section 32 (Asset Encumbrance) of GBI’s “Annual Report 2016”. In the last two years, the maximum monthly net increase in collateral provided, resulting from the fluctuations in the market value of (hedging) derivatives amounted to EUR 132.2 million. Some of the Bank’s agreements contain ‘Additional Termination Event’ clauses based on potential downgrades. However, the Bank does not underwrite any credit derivatives, and uses only simple products related to FX and interest rate risk hedging. Moreover, all derivatives under CSAs are marked-to-market daily and collateral is posted to or received from the counterparty on a daily basis. As such, in the occurrence of an Additional Termination Event the Bank would not face an additional cash outflow. For derivatives transactions with clients the Bank is not obliged to provide collateral, but it is entitled to receive collateral from clients, hence there is no potential liquidity risk for the Bank. The repurchase transactions are subject to the Global Master Repurchase Agreement (GMRA). The increase in the positive replacement value of derivatives together with the increase in the repurchase transactions, have increased the total counterparty credit risk in 2016 compared to 2015. The credit exposures of the derivative transactions are calculated by using Mark-to-market Method and eligible collaterals are accounted for, where applicable. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 17
19. Table 6 .1.7-1 demonstrates the steps in the calculation of net derivatives credit exposure. Table 6.1.7-1 (EUR 1,000) Positive Replacement Value 31.12.2016 Repurchase transactions Interest rate derivatives FX derivatives and Options Other derivatives Total (EUR 1,000) Potential Future Credit Exposure Exposure 12 Value Collateral Held Net 13 Exposure 169,432 4,578 92,838 5,435 272,283 129,094 4,091 0 133,185 40,338 4,578 88,747 5,435 139,097 313 68,630 955 69,898 4,265 24,208 4,480 32,953 Positive Replacement Value Potential Future Credit Exposure Exposure 14 Value Collateral Held Net 15 Exposure 139 48,809 21,261 70,209 4,531 46,908 11,598 63,036 319,138 4,670 95,717 32,858 452,384 258,194 24,605 4,382 287,182 60,944 4,670 71,112 28,476 165,202 31.12.2015 Repurchase transactions Interest rate derivatives FX derivatives and Options Other derivatives Total The distribution of derivatives notional amounts by residual maturity and information on the fair value of the derivatives are provided in Section 33.1.e and Section 34, respectively, of GBI’s “Annual Report 2016”. 6.1.8. Credit Risk Mitigation Credit risk mitigants are financial collaterals and guarantees which directly decrease the credit exposure or transfer the credit risk from obligor to guarantor. GBI applies diversified collateral requirements and a systematic approach to evaluation of collaterals submitted by customers, which depend on the transaction type and purpose, including but not limited to cash margins, physical commodities, receivables, cash flows, guarantees, accounts, financial instruments and immovable or movable assets. The value of collateral is usually monitored on a regular basis to ensure timely measures are taken, if necessary. Financial collaterals are valued on a daily and immovable/movable property on at least a yearly basis. The use of collateral to reduce counterparty credit exposure is also embedded in the standard legal agreements used throughout the industry as explained in Section 6.1.7. For derivative transactions, the legal agreements include the ISDA derivatives agreements with CSA. The range of collateral that is eligible for the use of credit risk mitigation is based on the regulatory capital calculation method that is used. GBI uses the Financial Collateral Comprehensive method in the calculation of credit risk mitigation factors. Financial collateral received mostly consists of cash, 12 Exposure value refers to the sum of positive replacement cost and potential future credit exposure, however for Repurchase transactions, it includes mark-to-market value of the securities provided as collateral (after application of regulatory volatility haircuts). 13 Exposure after collateral mitigation 14 Exposure value refers to the sum of positive replacement cost and potential future credit exposure. For repurchase transactions, it includes mark-to-market value of the securities provided as collateral (after application of regulatory volatility haircuts). 15 Exposure after collateral mitigation GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 18
20. but also includes debt securities , and hence is not subject to significant concentration. The credit quality of unfunded credit protection providers is assessed as per the credit policy of the Bank. The total exposure value that is covered by financial and other collaterals recognized as eligible credit 16 risk mitigation by the CRR s as follows: Table 6.1.8-1 (EUR 1,000) 31.12.2016 Central Gov. & Central Banks Institutions Corporates Retail Total 31.12.2015 Central Gov. & Central Banks Institutions Corporates Retail Total Financial Collateral Guarantees Other Collateral Total 70,000 71,425 77,893 8,413 227,731 60,172 321,683 381,855 - 70,000 131,597 399,576 8,413 609,586 150,000 114,429 111,349 7,688 383,465 18,371 325,044 343,415 - 150,000 132,800 436,393 7,688 726,880 16 Similar table in Section 33.1.b of GBI’s “Annual Report 2016” presents all collateral received only for loans and advances, while the figures presented here contain only collateral used as credit risk mitigation in the capital requirement calculation, for all assets. GARANTIBANK INTERNATIONAL N.V. CAPITAL ADEQUACY AND RISK MANAGEMENT REPORT 2016 19