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Credit risk

Credit risk relates primarily to a counterparty’s potential inability to meet its obligations towards Triodos Bank and the losses that might be incurred as a result. Credit risk concerns both payment arrears and negative changes due to a counterparty’s lower credit rating. Credit risk also includes concentration risk in the credit and investment portfolio, which is the risk Triodos Bank faces that large (connected) individual exposures and significant exposures to groups of counterparts whose likelihood of default is driven by common underlying factors, e.g. sector, economy, geographical location and instrument type, fail to meet their obligations. Credit risk relates to all financial assets such as loans, deposits with financial institutions and bonds.

Loans

Loans are provided to businesses and projects that contribute to achieving Triodos Bank’s mission. Given that this involves a small number of sectors, higher sector concentration is inherent to the loan portfolio. Concentration on the existing sectors is acceptable as Triodos Bank has considerable expertise in these sectors and actively invests in further increasing knowledge within the organisation.

Triodos Bank executes country analysis in all countries where branches are located. These analysis give insight in the overall development within a country and especially focuses on developments in the sectors were the local branch has a large loan portfolio.

Triodos Bank also executes local and group sector studies on the larger sector concentrations. These analysis show low correlation between the countries. This means that the spread of the loan portfolio among different countries is a risk mitigation factor. The outcome of the executed sector stress tests gives confidence on the concentration risk profile Triodos Bank faces.

Also the high quality of securities (collateral) against outstanding loans reduces the credit risk. Principal collateral are mortgage registrations for business or private properties, securities from public authorities, companies or private individuals, and rights of lien on movables, such as office equipment, inventories, receivables and/or contracts for projects.

Special attention was paid in 2013 to the risks of the solar energy credit portfolio in Spain after the announcement by the government of Spain of a material cut in the subsidies scheme supporting this sector, with retrospective effect. Based on an extensive analysis and stress testing of this credit portfolio we have concluded that this new regulation will not affect the valuation of this loan book. At the date of drafting this annual report, the 20 days consultation period of this new law has not yet been completed. Consequently, this law has not yet come into force.

Credit Risk management

Triodos Bank’s basic and clear and focused straightforward business model mitigates, to a large degree, credit risk. The main characteristics of the model that are the most relevant from purely credit risk management perspective are:

  • Lending consistently in line with the Triodos Bank Mission
  • Lending primarily to sectors where Triodos Bank has already built extensive experience
  • Lending primarily in countries where Triodos Bank has a branch, or proven expertise
  • Financing only clearly defined assets, activities or projects within each organisation
  • Maintaining direct relationships with borrowers
  • Lending based on a solid business model and related cash flows secured by collaterals
  • Investing mainly in government (guaranteed) bonds of the home countries, only for the purposes of managing its own balance sheet
  • Having limits on healthy financial institutions, with a strong orientation on retail banking or development finance, as well as public entities with a state risk profile
  • Portfolio with a balance between, on the one hand, exposure in sectors where Triodos Bank has a good knowledge and strong track-record, and, on the other, diversification by providing credits to many small enterprises.

Not withstanding the above, as a bank, Triodos is by the nature of its activities exposed to credit risk. Credit risk emanates from Triodos Bank’s dealings with individuals, corporate, financial institutions, public entities or sovereigns. Credit risk arises anytime bank funds are extended, committed, invested or otherwise exposed through actual or implied contractual agreements, whether reflected on or off balance sheet (such as loan commitments or bank guarantees). In the commercial loans portfolio, as the largest source of credit risk, (credit) losses stem from outright default due to inability or unwillingness of a client or counterparty to meet commitments in relation to lending and settlement.

Triodos Bank manages credit risks at various levels. Credit Risk management within Triodos Bank NV is fully integrated in the daily activities of the lending organisation and especially at the local branch level. At the highest level, the Executive Board determines the credit risk strategy, and the credit risk policy framework, as well as its limits. On regular basis group and local sector limits, country limits and concentration limits are recalibrated to support the diversification in the loan portfolio.

The Audit & Risk Committee of the Supervisory Board regularly assesses the credit risks stemming from lending activities.

Triodos Bank has credit risk systems and procedures in place for identification, acceptance, measurement, monitoring and control risks, such as credit, collateral and concentration.

Triodos Bank has an early warning system that helps identify problem loans ahead of time, when there still may be more options available for remedial measures. Once a loan is identified as in default (e.g. overdue payments beyond 90 days), it is managed under a dedicated remedial process, with a focus on full recovery.

Triodos Bank complies with the relevant guidelines regarding single risk, which is assumed in economic linkages between entities and in control of one entity over another. The main focus is to manage such concentrations and aim at diversification between debtors and connected groups, which is based on acknowledgement that the overall credit risk differs from a mere sum of individual risks.

Credit and concentration risk management is always performed according to the supervision rules and regulation provided by the appropriate regulator for the banking sector.

Lending organisation

Lending is primarily the responsibility of local branches, who maintain close relationships with their customers. Lending decisions are made by local credit committees in each of the branches. Each local credit committee is authorised to make decisions within agreed parameters and limits set by the Executive Board. Based on the advice of the Executive Board Credit Committee, the Executive Board decides on loans that exceed these limits.

All business loans in the portfolio are periodically reviewed on an individual basis. The frequency depends on the debtor’s creditworthiness, the degree of market exposure and the market in which the debtor operates.

The credit committee of the branch discusses and, if necessary, takes action with respect to overdue payments from debtors. If there is any doubt regarding the continuity of the debtor’s core operations and/or a debtor fails to settle agreed interest and repayment installments for a prolonged period, this debtor falls under the category of doubtful debtors and will be managed intensively.

Provisions for loan losses are recorded for doubtful debtors based on the difference between the total amount of the debtor’s outstanding liability to Triodos Bank and the future expected cash flows discounted at the original effective interest rate of the contract. In 2013, the net additions to the provision for doubtful debts, as a percentage of the average loan portfolio, was 0.49% (2012: 0.67%). The total of provisions related to the outstanding credits is 1.7% (2012: 1.7%) as at the end of the year.

The credit risk in the loan portfolio is reported each month to the Executive Board Credit Committee, and quarterly to the Supervisory Board.

Governments and Financial institutions

Liquidity not invested in loans to customers are invested in bonds or placed with other banks. Triodos Bank’s policy is to invest in the country where the money is entrusted. The Executive Board may deviate from this policy, after consultation with the Asset and Liability Committee. The bond portfolio of Triodos Bank is mainly comprised of government, and government guaranteed bonds. Triodos Bank also invests in a limited number of other types of high grade bonds issued by regional authorities, and financial institutions.

Banks are selected on the basis of their creditworthiness and screened on their sustainability performance. Exceptions can occur, when the number of selected banks in a country is not sufficient to place Triodos Bank’s liquidities using a certain maximum concentration per individual bank. In such cases, deposit notice periods will not exceed three months. All counterparty limits for banks are granted by the Executive Board after advice from the Executive Board Credit Committee. Triodos Bank uses Fitch and/or Moody’s credit rating to assess the counterparty risk related to bonds and financial institutions, if available.

Risk weighted value

An overview of the credit risk position within Triodos Bank, based on risk-weighted assets, off-balance sheet items and derivatives, is given in the following tables which are divided by the following criteria: exposure class, sector and country.

Risk-weighted value per exposure class (asset class)

Download XLS

2013
Amounts in thousands of EUR

Net exposure
value

Credit risk
mitigation

Fully adjusted
exposure value

Risk-weighted
value

 

 

 

 

 

Exposure class:

 

 

 

 

 

 

 

 

 

Central governments and central banks

1,768,334

326,870

2,095,204

Regional governments and local authorities

162,218

138,206

300,424

373

Public sector entities

59,210

59,210

11,342

Multilateral Developments Banks

44,995

44,995

Banks

929,590

–118,233

811,357

159,095

Corporates

2,480,108

–277,402

2,202,706

1,924,772

Retail exposures

160,383

–21,680

138,703

73,811

Secured by property

1,378,810

–39,071

1,339,739

908,186

Past due items

62,233

–8,690

53,543

70,027

Other items

79,175

79,175

79,175

 

 

 

 

 

 

 

 

 

 

Total

7,125,056

7,125,056

3,226,781

 

 

 

 

 

Whereof:

 

 

 

 

Assets

6,427,361

6,427,361

2,947,225

Off-balance sheet items

671,441

671,441

266,956

Derivatives

26,254

26,254

12,600

 

 

 

 

 

 

 

 

 

 

Total

7,125,056

7,125,056

3,226,781

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Net exposure
value

Credit risk
mitigation

Fully adjusted
exposure value

Risk-weighted
value

 

 

 

 

 

Exposure class:

 

 

 

 

 

 

 

 

 

Central governments and central banks

1,001,159

201,111

1,202,270

Regional governments and local authorities

277,989

45,713

323,702

335

Banks

836,603

–35,342

801,261

176,490

Corporates

2,371,288

–169,468

2,201,820

1,895,790

Retail exposures

105,163

–28,760

76,403

44,638

Secured by property

1,241,654

–3,513

1,238,141

871,732

Past due items

59,828

–9,741

50,087

67,728

Other items

70,639

70,639

70,639

 

 

 

 

 

 

 

 

 

 

Total

5,964,323

5,964,323

3,127,352

 

 

 

 

 

Whereof:

 

 

 

 

Assets

5,271,217

5,271,217

2,827,869

Off-balance sheet items

667,820

667,820

282,258

Derivatives

25,286

25,286

17,225

 

 

 

 

 

 

 

 

 

 

Total

5,964,323

5,964,323

3,127,352

 

 

 

 

 

The net exposure value is a sum of:

  • Assets excluding intangible assets, excluding discount of subordinated liabilities (included under prepayments and accrued income) and after deducting discount of bonds (included under accruals and deferred income);
  • Off-balance sheet items, consisting of contingent liabilities and irrevocable facilities;
  • Derivatives, valued at the credit risk equivalent, which is based on the additional costs or the lost revenues of a substitute transaction in the event that the counterparty does not fulfil its obligations.

Credit risk mitigation relates to received collaterals (guarantees and pledged funds entrusted). As a result, the credit risk shifts from the exposure class of the direct counterparty to the exposure class of the collateral provider. This results in the fully adjusted exposure value for each exposure class.

The risk-weighted value is calculated by multiplying the fully adjusted exposure value with the risk weight and the conversion factor. Basel II guidelines state the definition of the exposure classes, the risk weights and conversion factors.

Risk weights depend on the exposure class and the credit rating of the direct counterparty or the collateral provider. The risk weights per exposure class used by Triodos Bank are in line with Basel II rules:

  • Central governments and central banks: 0%;
  • Regional governments and local authorities: 0% for Dutch governments, 20% for foreign governments; the percentage depends on national legislation;
  • Public sector entities: 20% Dutch entities, foreign entities 100%;
  • Banks: 0% for exposures secured by pledged funds entrusted of Triodos Bank; 20% or 50% for exposures of or guaranteed by other banks, depending on the original term to maturity of the exposure;
  • Multilateral Developments Bank: 0% for listed banks, other same as exposure class banks;
  • Corporates: 100%;
  • Retail exposures: 75% or 100%;
  • Secured by property: 35% for exposures secured by residential property, 50% or 100% for exposures secured by non residential property;
  • Past due items: 50% or 100% for exposures secured by residential property; 100% or 150% for other exposures; the percentage depends on the amount of bad debt provisions that have been formed;
  • Other items (participating interests, property and equipment and other assets without counterparties): 100%.

Conversion factors only apply to off-balance sheet items. The conversion factors used by Triodos Bank are:

  • Contingent liabilities: 0.5 or 1.0, depending on the nature of the issued guarantee;
  • Irrevocable facilities: 0.2 or 0.5, depending on the original term to maturity of the credit facility.

Risk-weighted value per sector

Download XLS

2013
Amounts in thousands of EUR

Net exposure value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Banks and financial intermediation

1,966,272

28

205,358

6

10

Basic materials

15,064

15,303

1

102

Construction and infrastructure

1,368

826

60

Consumer products (non-food)

5,961

3,921

66

Retail

19,183

14,808

1

77

Services

440,439

6

360,316

11

82

Healthcare and social work

540,153

7

389,825

12

72

Agriculture and fishing

119,535

2

107,830

3

90

Media

43,844

1

29,125

1

66

Utilities

1,253,077

17

1,090,764

34

87

Public Administration

913,908

13

Private individuals

330,156

5

117,142

4

35

Technology

444

404

91

Leisure and tourism

111,481

2

103,787

3

93

Transport and logistics

8,333

7,306

88

Real estate

707,667

10

421,503

13

60

Insurance and pension funds

502

501

100

Food and beverages

64,787

1

55,991

2

86

Other sectors

582,882

8

302,071

9

52

 

 

 

 

 

 

 

 

 

 

 

 

Total

7,125,056

100

3,226,781

100

45

 

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Net exposure value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Banks and financial intermediation

1,353,300

23

260,551

8

19

Basic materials

15,855

14,508

92

Construction and infrastructure

1,364

802

59

Consumer products (non-food)

6,013

3,987

66

Retail

22,732

17,439

1

77

Services

415,164

7

333,201

11

80

Healthcare and social work

481,333

8

365,334

12

76

Agriculture and fishing

114,975

2

107,097

4

93

Media

23,042

14,461

63

Utilities

1,197,395

20

1,064,418

34

89

Public Administration

835,018

14

Private individuals

226,003

4

93,651

3

41

Technology

474

474

100

Leisure and tourism

100,732

2

91,993

3

91

Transport and logistics

11,358

10,321

91

Real estate

582,795

10

346,807

11

60

Insurance and pension funds

501

501

100

Food and beverages

70,938

1

64,715

2

91

Other sectors

505,331

9

337,092

11

67

 

 

 

 

 

 

 

 

 

 

 

 

Total

5,964,323

100

3,127,352

100

52

 

 

 

 

 

 

The sectors are defined in the Basel II guidelines. Risk-weighted value is attributed to the sector of the direct counterparty.

Risk-weighted value per country

Download XLS

2013
Amounts in thousands of EUR

Net exposure
value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Australia

660

660

100

Belgium

1,290,105

18

547,982

17

42

Denmark

5,333

4,305

81

France

240,825

3

202,317

6

84

Germany

300,334

4

151,375

5

50

Ireland

53,681

1

52,142

2

97

Italy

2,909

2,908

100

Luxembourg

49,337

1

4,341

9

The Netherlands

3,048,747

43

1,026,916

32

34

Norway

125

122

97

Spain

1,169,267

16

711,615

22

61

Sweden

58

55

94

United Kingdom

963,658

14

522,034

16

54

United States

4

1

38

Other countries

13

8

62

 

 

 

 

 

 

 

 

 

 

 

 

Total

7,125,056

100

3,226,781

100

45

 

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Net exposure
value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Australia

800

800

100

Belgium

1,237,252

21

596,477

19

48

Denmark

6,764

5,489

81

France

199,690

3

169,159

5

85

Germany

226,595

4

177,382

6

78

Ireland

57,943

1

56,925

2

98

Italy

3,155

3,155

100

Luxembourg

5,448

5,377

99

The Netherlands

2,479,701

42

928,107

30

37

Norway

142

138

98

Spain

911,357

15

685,229

22

75

Sweden

58

54

93

United Kingdom

835,396

14

499,051

16

60

United States

4

1

38

Other countries

18

8

44

 

 

 

 

 

 

 

 

 

 

 

 

Total

5,964,323

100

3,127,352

100

52

 

 

 

 

 

 

Risk-weighted value is attributed to the country of the direct counterparty.

Maturity per exposure class (asset class)

The following tables provide an overview of the remaining maturity of the assets per exposure class. The payable on demand and indefinite maturities include accrued interest and fees, doubtful debt provisions and balance sheet items with no or unknown maturity.

Download XLS

2013
Amounts in thousands of EUR

Payable on
demand
and
indefinite

2 days or
more and
shorter than
3 months

More than 3 months and shorter than 1 year

More than
1 year
and shorter
than 5 years

More than
5 years

Total
assets

 

 

 

 

 

 

 

Central governments and central banks

914,226

60,155

90,843

357,722

345,388

1,768,334

Regional governments and local authorities

2,670

13,000

1,000

31,121

114,365

162,156

Public sector entities

460

750

53,000

54,210

Multilateral Developments Banks

81

44,914

44,995

Banks

304,425

230,654

50,000

220,930

107,334

913,343

Corporates

92,154

60,873

163,702

653,178

995,275

1,965,182

Retail exposures

4,126

769

3,480

10,170

62,929

81,474

Secured by property

45,007

15,665

40,536

264,788

930,263

1,296,259

Past due items

32,121

652

1,602

9,920

17,938

62,233

Other items

79,175

79,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,474,445

381,768

351,163

1,548,579

2,671,406

6,427,361

 

 

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Payable on
demand
and
indefinite

2 days or
more and
shorter than
3 months

More than 3 months and shorter than 1 year

More than
1 year
and shorter
than 5 years

More than
5 years

Total
assets

 

 

 

 

 

 

 

Central governments and central banks

395,736

10,059

73,458

274,030

247,875

1,001,158

Regional governments and local authorities

2,436

105,000

81,500

39,156

49,000

277,092

Banks

250,495

163,546

175,555

222,954

13,899

826,449

Corporates

77,638

42,243

129,883

545,245

1,013,820

1,808,829

Retail exposures

4,437

680

2,380

8,672

55,745

71,914

Secured by property

41,592

13,738

35,835

217,150

846,993

1,155,308

Past due items

29,367

663

1,790

13,681

14,327

59,828

Other items

70,639

70,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

872,340

335,929

500,401

1,320,888

2,241,659

5,271,217

 

 

 

 

 

 

 

Bad debts and overdue receivables

The following tables provide an overview of the bad debts and overdue receivables per sector and country.

Bad debts are loans we expect will not be fully repaid in accordance with the original loan contract. Provisions for loan losses are taken for doubtful debtors based on the difference between the total amount of the debtor’s outstanding liability to Triodos Bank and the future expected cash flows discounted at the original effective interest rate of the contract. Overdue receivables are loans overdue in excess of 90 days.

Movements bad debts

Download XLS

Amounts in thousands of EUR

2013

2012

 

 

 

Balance sheet value as at 1 January

130,636

104,054

Classified as bad debt during the year

41,190

42,387

Interest charged on bad loans

3,035

2,104

Release of bad loans/transfer to not impaired

–7,382

–11,779

Bad loans written off

–6,185

–2,178

Repayments

–8,568

–4,151

Exchange rate result

–34

199

 

 

 

 

 

 

Balance sheet value as at 31 December

152,692

130,636

 

 

 

Bad debts and overdue receivables per sector

Download XLS

2013
Amounts in thousands of EUR

Bad debts
at year end

Provision for Bad debts at year end

Value adjustments in the year

Overdue receivables
(excl. Bad debts) at year end

 

 

 

 

 

Basic materials

12,718

945

710

2,900

Construction and infrastructure

51

50

Consumer products (non-food)

151

66

–4

Retail

642

387

34

14

Services

17,056

3,151

1,221

2,491

Healthcare and social work

27,536

8,237

4,002

4,114

Agriculture and fishing

19,004

4,504

1,126

4,392

Media

1,658

828

755

1,370

Utilities

29,912

25,334

1,859

2,486

Private individuals

566

Leisure and tourism

20,262

8,485

3,328

652

Transport & logistics

Real Estate

261

132

–324

105

Food and beverages

8,793

4,562

2,769

4,443

Other sectors

14,648

5,368

1,585

1,140

 

 

 

 

 

 

 

 

 

 

Total

152,692

62,049

17,061

24,673

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Bad debts
at year end

Provision for Bad debts at year end

Value adjustments in the year

Overdue receivables
(excl. Bad debts) at year end

 

 

 

 

 

Basic materials

379

235

48

Construction and infrastructure

51

51

12

Consumer products (non-food)

507

164

69

Retail

685

353

222

79

Services

12,888

1,847

915

1,597

Healthcare and social work

20,883

4,306

2,580

13,899

Agriculture and fishing

24,043

9,496

2,880

6,949

Media

70

70

29

790

Utilities

38,097

28,261

11,988

2,462

Private individuals

7

Leisure and tourism

12,249

4,802

262

787

Transport & logistics

56

32

–17

Real Estate

2,057

469

415

93

Food and beverages

4,466

1,619

771

8,525

Other sectors

14,205

4,454

737

1,528

 

 

 

 

 

 

 

 

 

 

Total

130,636

56,159

20,911

36,716

 

 

 

 

 

Bad debts and overdue receivables per country

Download XLS

2013
Amounts in thousands of EUR

Bad debts
at year end

Provision for Bad debts at year end

Value adjustments in the year

Overdue receivables
(excl. Bad debts) at year end

 

 

 

 

 

Belgium

12,470

6,754

–630

839

France

Germany

14,656

6,793

4,376

2,971

Ireland

714

370

6

992

The Netherlands

82,413

36,516

8,305

2,464

Spain

30,296

6,420

2,687

13,926

United Kingdom

12,143

5,196

2,317

3,481

 

 

 

 

 

 

 

 

 

 

Total

152,692

62,049

17,061

24,673

 

 

 

 

 

Download XLS

2012
Amounts in thousands of EUR

Bad debts
at year end

Provision for Bad debts at year end

Value adjustments in the year

Overdue receivables
(excl. Bad debts) at year end

 

 

 

 

 

Belgium

26,014

16,082

3,218

293

France

Germany

7,371

2,249

889

17,490

Ireland

714

370

89

1,084

The Netherlands

72,797

30,241

14,294

4,476

Spain

16,578

3,819

1,520

10,115

United Kingdom

7,162

3,398

901

3,258

 

 

 

 

 

 

 

 

 

 

Total

130,636

56,159

20,911

36,716