7. Rules and process of corporate credit risk management
7.1. Reviews and Credit Risk Rating
Commercial functions who grant credits are separated from the process of transaction- and client risk rating (the four-eye principle). Credit risk is rated (by the Risk Manager) based on the principle of separation from the commercial functions (Relationship Manager).
The following parties are involved in the process of risk rating: Rating Owner (Front Office unit servicing the client) and Risk Manager.
The Rating Owner inputs the financial data related to the client and has exclusive responsibility for the correctness of the risk rating, including review.
There is only one owner of a borrower’s risk rating. The risk management unit responsible for restructuring and debt collection (i.e. Corporate Credit Restructuring Department or regular risk unit in case of lower credit exposures) becomes a rating owner for borrowers rated 18 to 22.
The Rating Owner makes the rating proposal using the rating model dedicated for a given group of clients.
The final rating is determined by the Risk Manager, or by the Appeal Judge if an appeal has been made (who is also an employee of the Credit and Market Risk Management Division).
The Risk Manager is responsible for:
- verifying that the appropriate rating model has been used for the borrower,
- verifying that financial and non-financial data entered are correct,
- assessment of the financial data,
- finalizing the rating in case the appeal has not been requested.
The outcomes of specific models may be subjects to arbitrary adjustments in that the ultimate rating grades are determined as part of the appeal process.
A one notch difference (positive or negative) between the rating calculated by the rating model and the view of the appellant (the person initiating an appeal) is sufficient to start a rating appeal.Reasons for a rating appeal are for example:
- circumstances that may not (yet) be captured by the rating model but which are likely to have a (usually negative) effect on the borrower’s PD, especially if:
- borrower has or is expected to default on any financial obligation to any party,
- major disruption of client’s activities,
- change in legislation that will seriously impact the client’s financial performance.
- additional information is available supporting the setting of the rating for customer.
IT system in Bank, used also in whole ING Group, supports credit risk assessment process and enables, as well, centralized gathering data on risk rating grades of clients.
7.2. Frequency of Risk Rating Reviews and Updates (if any)
Only the Rating Owner can review the risk rating. The following rules will apply to rating reviews:
- a risk rating must be reviewed at least annually; a risk rating is considered overdue after 12 months from the last approval date of the risk rating,
- the Rating Owner should take appropriate action to either review or cancel the risk rating if the Bank has terminated the relationship with the Borrower and no credit risk remains; the Rating Owner should perform an interim re-rating when the value of one or more risk drivers has materially changed. Events that could cause a consideration for a re-rating are for example a change of risk rating of the influencing parent or a change of any of the qualitative risk drivers,
- without a review till the end of 18 months from the last approval date of the risk rating, a risk rating will automatically expire (not applicable for irregular borrowers whose ratings do not expire).
7.3. Concentration Limits
To mitigate the concentration risk, the Bank in 2014 observes the following exposure concentration limits as defined in Article 71 of the Banking Law Act:
- limit of 25% of the Bank’s own funds – as regards other domestic bank, credit institution, foreign bank or a group of equity- or organisationally linked entities consisting in at least one domestic bank, credit institution or foreign bank,
- limit of 25% of the Bank’s own funds – as regards other entities.
Furthermore, in keeping with the statutory rules and recommendations of the banking regulator, the Bank sets internal concentration limits for exposures to specific sectors, the collaterals accepted, and it monitors on a regular basis the concentration levels in the geographical areas of its operations (the Regions).
The Bank sets the statutory concentration limits on a monthly basis. Based on the data verified, the Bank prepares a report covering the up-to-date balance of the Bank’s own funds and the individual statutory limits. The report is then distributed among the Bank units concerned, including among others: the Corporate Banking Centres, the Regional Branches, the departments of the Credit Division and Risk Division. The Regional Branches redistribute the report among their respective subordinate units.
The Bank monitors the utilisation of limits by preparing a specification of clients and groups of related clients, and by comparing their existing exposure to the current limits.
On the operational level, the control of concentration limits is performed during the writing of credit applications, approving specific transactions and periodic reviews.
Both over the year 2014, the exposure concentration limits were not overrun.
To avoid excessive credit risk concentration in the sectors, the Bank monitors the exposures in the individual economy sectors. Based on analyses, the Bank sets the desired directions where its exposure should increase, and the sectors with unfavourable development perspectives in which the exposure should be lowered.
The above tasks also include among other things the determination of limits for groups of sectors with a material share in the Bank’s portfolio, i.e. whose total share in the entire credit portfolio is around 60%. Limits for the individual sectors are determined by the Credit Policy Committee.
Industry concentration of exposures to corporate clients
|industry||exposure (on-balance and off-balance)|
|end of 2014||end of 2013|
|share in total
|share in total
|real estate service||4,662.2||8.3%||3,693.3||7.7%|
|public administration and national defense||4,139.8||7.3%||3,889.9||8.1%|
|foodstuff and beverage production||3,255.0||5.8%||3,074.4||6.4%|
|land and pipeline transportation||2,067.9||3.7%||1,324.2||2.8%|
|ready-made metal goods productions||1,665.4||3.0%||1,428.8||3.0%|
|agriculture, foresty, fishery||1,370.4||2.4%||816.2||1.7%|
|computer industry and associated service||1,163.8||2.1%||587.6||1.2%|
|mechanical vehicles sale, repair and service||894.6||1.6%||987.8||2.1%|
|remaining non-metal raw materials industries||887.5||1.6%||812.9||1.7%|
Exposure concentration in the geographical areas is monitored according to the regional division into the branch network. A 20% limit of the Bank’s total portfolio is adopted for controlling concentration at the level of Regions. Exceeding this limit may trigger setting a geographical limit.
However, since geographical concentration is minor and does not increase the credit risk, so far there has been no need for ING Bank Śląski to set geographical limits.
Group’s greatest exposures
The table below presents the breakdown of 20 largest Group exposures towards entities/ related entities (inclusive of groups of entities wherefor the bank is a parent entity). The amount of exposures takes account of the value of the balance sheet assets (extended loans, deposits made and debt securities), extended off-balance sheet exposures and the value of balance sheet equivalent of derivatives. Exposures were reduced by the amounts of exclusions admissible under Polish Financial Supervision Authority Resolution No. 208/2011 of 22 August 2011.
|client||exposure in PLN million|
|end of 2014||end of 2013|
|Group 6 (banking)||766.2||439.6|
|Group 13 (banking)||504.5||232.9|
|Group 14 (banking)||468.9||360.9|
|Group 20 (banking)||425.4||318.6|
Considering the potential risk level, the Bank introduced limits for mortgage loans in accordance with Recommendation S of the Polish Financial Supervision Authority for the following types of facilities:
- mortgage secured financing – Network,
- mortgage secured financing – Strategic Clients,
- portfolio of mortgage secured retail credit exposures,
- portfolio of credit exposures in foreign currencies,
- value of the retail portfolio of credit exposures secured by a commercial property,
- share of consolidation loans,
- value of credit exposures, with maturity over 30 years at the time of opening account
- share of the biggest single region,
- value of the portfolio of credit exposures provided by the external sales channels,
- share of 30+ DPD loans in the IBNR portfolio of credit exposures granted though the external sales channels in the mortgage segment,
- share of the portfolio with current LTV above 80% for PLN retail portfolio,
- share of the portfolio with current LTV above 80% for NON-PLN retail portfolio.
Adherence to the statutory and internal concentration standards is the subject of a monthly risk report distributed among the Management Board and Credit Policy Committee. The report is also presented to the Supervisory Board of the Bank on a periodic basis.
7.4. Repayment Security and Other Forms of Credit Risk Mitigation
Even though repayment security is a major factor that allows the Group to mitigate the lending risk, it is the Group’s policy to extend loans in amounts and on terms that allow for regular repayment without the need to recover the receivables by liquidating the security.
The Group accepts all types of repayment security permitted by the law; however, the choice in specific cases is conditioned by various factors, including in particular:
- the client’s ability to offer specific types of security,
- the type and duration of exposure,
- the level of client’s risk,
- the level of transaction’s risk
- the liquidity of security offered (the ability to cash it easily),
- the collateral value.
The Internal regulations of the parent entity (the Bank) concerning collateral and cover , among others, the following areas:
- indications of the criteria for accepting the collateral in the capital requirement for credit risk calculation process,
- setting the general rules for the Bank when choosing the collateral forms, inclusive of the acceptable credit risk level,
- adjustment to the collateral-related procedures and to the requirements of the LGD models that are in harmony with the advanced internal ratings’ method (the so-called AIRB).
Moreover the internal regulations of the parent entity (the Bank) concerning collateral and cover take into account in particular those aspects of the Regulation (EU) No 575/2013 of the European Parliament with subsequent amendments, which concern the application of LGD models, legal reliability of security and its monitoring.
The LGD models developed for corporate assets are based on statistically estimated recovery ratios for specific groups of security. The estimations are based on an analysis of historical recovery processes at the Bank. The rates of recover for specific types of security determine their fair value.
The recovery rate for a specific type of security depends on the character of the security item, the legal form of the security and the efficiency of the security liquidation process. The final level of the recovery is also influenced by the costs of debt-collection and the costs of keeping a classified exposure in the Bank’s books (until the debt is recovered or cancelled).
Apart from the classic types of security (tangible and personal), the Bank also applies additional instruments to mitigate the risk of loss, namely additional covenants in loan agreements. As part of the basic or standard covenants, the Bank applies protective and financial clauses. The scope of the covenant or combination of covenants to be applied depends on: the term, type of lending product, the specific organisational and legal form or the business objects of the borrower, the risk rating of the client. By including certain covenants in the credit agreements, the Bank is sometimes able to give up some or all of the repayment security.
The structure of individual security types is diversified. The following types of collateral have the biggest share:
- suretyships and corporate guarantees – there are guarantors from different industry sectors with different economic and financial standing within this group. Therefore, there is no significant risk in terms of concentration. In case of assuming a specific recovery ratio from collateral, greater than 0%, it is necessary to examine the economic and financial standing of the guarantor and determine the risk rating as investment or speculative.
- mortgages – this is due to the fact that mortgages usually secure long-term investment loans. Furthermore, mortgages are the main security for loans to finance commercial real estate.
7.5. Exposure Classification Methodology
7.5.1. Customer Risk Class Determination in the case of the regular portfolio
Each entity with the Bank’s credit exposure must have an internal rating assigned as is used in a standard manner at the Bank and ING Group. Determination of the customer risk class forms an integral part of the Bank’s credit risk evaluation process for corporate clients, which is independent from the credit transaction approval process.
For entrepreneurs’ exposures, the Bank uses a 22 grade rating, employed throughout ING Group. Its classes present the debtor-related risk. The customer is assigned to a given risk class based on the:
- statistical model, using the data from the debtors’ financial reports,
- evaluation of qualitative factors,
- financial standing of the parent company.
Investment Grade 1-10
Investment grade comprises the entities which we assess as encumbered with a relatively low risk; however, in making risk classification, Bank takes account of the threats arising from economic and business conditions. This group includes borrowers with solid level of revenues and margins, strong balance sheet structure and long-term, stable perspective.
Speculative Grade 11 - 17
It is a group of a relatively large bucket of risk levels, and thus the characteristics of extreme classes within this group varies considerably. In general, we may say that:
- the entities from top classes under this group are fulfilling their financial obligations at present, however the debt cover ratio (principal and interest) over a longer term is not certain, and thus the safety margin is limited; there is real threat of credit risk growth due to unfavourable business or economic conditions;
- the borrowers assigned to the top risk classes (the worst classes from that group) can be characterised by uncertain income perspectives, worse quality of assets and over a longer term the risk of equity mismatch and possibility of loss occurrence.
Problem Loan Grade 18 - 22
This risk group comprises the borrowers who showed explicit symptoms of problems with debt service or who are in the situation of financial asset impairment. Also clients with forborne exposure are classified in this group if performing forborne contract becomes more than 30 calendar days past-due or if additional forbearance measures are taken.
Borrowers from this risk group are rated first of all by Corporate Credit Restructuring Department and in limited scope by regular risk units.
7.5.2. Corporate Credit Risk Management Tools
Following the requirement of keeping the permanent compliance with the use of the advanced internal-ratings based approach (AIRB) for the purpose of regulatory capital calculation1, Bank developed, implemented, monitored and validated models in accordance with requirements of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013, for the following basic risk parameters:
- PD (probability of default),
- LGD (loss given default),
- EAD (exposure at default)
for classes of assets in line with AIRB.
As far as corporate exposures are concerned, the following models, among others,
are applied at the Bank:
- for the strategic clients segment covering businesses with annual income from sales above EUR 100 million:
- PD rating model (expert and statistical) developed at the ING Group level accounting for the local data and monitored regularly on the local data,
- LGD and EAD models (hybrid, expert and statistical) also developed at ING Group level accounting for the local data and monitored regularly based on the local data,
- for the mid-sized, big-sized and small strategic companies segments (SME assets class) covering clients with annual income from sales in the range of EUR 0,8 to 100 million:
- PD rating model (expert and statistical) fully developed on the Bank’s internal data,
- LGD and EAD models (hybrid, expert and statistical) developed on the Bank’s internal data.
Besides the above, Bank uses specific models developed at ING Group level for exposures to banks and other financial institutions, to sovereigns and local governments as well as for specialised lending exposures.
The models are employed to calculate the economic capital allowing its level to be optimised. They contribute to a better quantification of the credit risk for the Bank’s portfolio.
On the basis of the models the provisions are calculated under IFRS standards. The models are appropriately adjusted (PD, LGD) in accordance with requirements of IAS 39 OS 87, in particular, the influence of current (the most recent) data and Point-in Time approach has been included. Additionally, LGD risk parameters for impaired exposures are determined by the time the exposure has been in default.
The models are used also for the measurement of the efficiency of Bank’s performance (RAROC, economic profit, goodwill management) and credit prices determination.
While employing the risk models, the Bank makes use of advanced IT systems supporting the client and transaction risk rating processes. An integrated ING Group’s environment is the primary IT tool used to manage credit risk. This tool combines key applications used in the credit risk management process. It enables the Bank to manage risk effectively not only on the Bank’s Branch level, but also on the level of individual relationship manager’s portfolio.
In some cases, ING Bank Śląski S.A. will work with an obligor and its other creditors (if any) to restructure the obligor’s business and its financial obligations in order to minimize any financial losses to the creditors as a whole, and Bank in particular. This can be accomplished through many means available to the creditors, the most common of which are:
- extending the repayment period,
- selling assets,
- selling business lines of the obligor,
- forgoing part of the financial obligations,
- a combination of the above.
The decision to enter into such a restructuring is done only after careful internal assessment and approval by the appropriate (internal) delegated authorities. Once a restructuring is completed, the obligor is again subject to normal credit risk monitoring procedures.
1 The Bank obtained the final approval to apply AIRB method for the corporate credit portfolio from the Dutch National Bank (DNB) and the Polish Financial Supervision Authority on 6 October 2011.