Transcript Audit Committee

Risk management in banks
Leoš Souček, Komerční banka
MFF UK – March 9, 2012
page 1
Introduction / Czech economic specifics… 1/2
Private debt to GDP - 2011Q1

Private sector indebtedness at the lower end of EU levels
300%
Indebtedness of corporate sector at 22% of GDP
250%
 Indebtedness of households 30% of GDP
 Dynamic growth of mass retail exposure (above 30% yoy in 2003- 200%
2008) slow-downed in 2010/2011 (6.6% yoy in 07/2011)
150%

100%
Also public sector indebtedness lower than EU peers
CZ at 38.5% end of 2010 (FR: 82%, DE: 83%, HU: 80%, PL: 55%,
SK: 41%, IT: 119%, GR: 143%)
 Budget deficit narrowed to -4.7% GDP in 2010 (SK: -7.9%,
HU: -4.3%, GR: -10.5%, FR: -7.0%, DE: -3.3%, AT: -4.8%)


Health care and pension reforms under progress
 S&P raised the LTFC Czech Republic rating to 'AA-'

50%
0%
Despite fragile political stability some progress in reforms,
which help to secure fiscal sustainability


Household debt to GDP
Cyprus
Luxembour
Denmark
Spain
Ireland
Portugal
Malta
Sweden
Netherlands
UK
Greece
Austria
Italy
France
Estonia
Germany
Latvia
Finland
Slovenia
Bulgaria
Belgium
Lithuania
Hungary
Czech Rep.
Poland
Slovakia
Romania

Non-financial corporation debt to GDP
Total external debt in % of GDP (Q4 2010)
250%
Public sector
Private sector
200%
150%
No concrete plans on EUR adoption
100%
50%
Limited dependence on external financing
Relative low level of external debt in terms of GDP
 External financing needs covered by FDI and EU funds

MFF UK – March 9, 2012
0%
Czech Hungary
Republic
Poland
U.S.
Germany France
Austria
page 2
Introduction / Czech economic specifics… 2/2
Limited share of private foreign currency debt
13.0% for private sector (in 7/2011, both residents and non
residents)
 17.4% for corporate, 0.14% for households (residents only)
export-oriented corporates as main users
 150% coverage ratio by foreign currency deposits (res. only)

80%
60%
Growth largely relying on external factors …
Share of nominal exports on GDP at 80% in 2010
 84% of exports concentrated on the EU-27 in 2010
(two predominant partners: Germany 32% and Slovakia 9%)
 Absence of major macroeconomic imbalances - current
account worsened to 3.8% of GDP in 2010
 Substantial foreign ownership following high FDI inflows

35.0
Share in GDP in %
Czech Republic
Austria
France
Germany
Hungary
0%
EMU
20%
Poland
Confirmed by CNB stress tests
 Sustained banking sector profitability since early 2000s
 Favorable loan-to-deposit ratio at 78% July 2011
 Strongly capitalized (in end-June, 15.9% average regulatory
capital ratio)

100%
40%
Healthy banking sector


120%
Slovakia

Loan-to-Deposit Ratio - March 11
140%
Czeh
Republic

Euro area
30.0
25.0
20.0
15.0
10.0
5.0
... and on the cyclical industry sectors
0.0
Industry sectors represents 30% of GDP (vs. 22% in Germany
and 12% in France)
 Highly cyclical (predominant car industry and machinery)

Agriculture,
hunting, forestry &
fishing
MFF UK – March 9, 2012
Industry
Construction
Trade,
transport &
communication
services
Business
activities &
financial
services
page 3
Introduction / Banking sector
As of
Zoom on KB:

SG Group member since 2002.

Third largest bank in ČR:
12/2011
Net profit

about 7 800 employees.

about 400 point of sales.
Three key banks (market share at about 70%)
KB
(SG Group)
ČS
(ERSTE Group)
ČSOB
(KBC Group)
9,5
13,6
11,2
Deposits (Bn CZK)
586,0
783,3
721,6
Loans (Bn CZK)
441,4
483,5
440,5
-7,3
-5,5
-5,0
Cost of Risk (Bn CZK)

KB initially corporate bank.
o/w loans
-2,0
-5,5
-1,8

Retail developed after 2000.
o/w other risks (Gr)
-5,3
0,0
-3,2
Cost of Risk (bps)
181bps (39bps)
114bps
36bps
Loan to Deposits
77,5%
71,9%
69,5%
LUSR
5,7%
6,0%
5,2%
CIR
41.2%
41,8%
44,8%
CAR
14,6%
13,1%
15,6%
ROE
12,3%
18,2%
17,3%

KB’s market share on credit lending:

Mortgages: 23%

Small Business: 20%

Corporates: 30%

Municipalities: 40%
MFF UK – March 9, 2012
page 4
Risk Management / Functions & Missions


Credit Risk Management

Retail: model based and statistical approach (PD, LGD, EL)

Individual approach for non-retail (Corporate, Banks, Sovereign)

Collateral Evaluation (independent on client or distribution channel, on-site visits)
Market Risk Management




FX, IR, commodity, credit risk, …
Monitoring and reporting

Quality of portfolio / Focus on sensitive sections / Distribution channels / Sensitivity to market (FX, IR, ..)

Back-testing of models
Recovery / Collection

Pre-early collection (-5DPD - 5DPD), Soft collection (5DPD – 90DPD)

Hard recovery (90DPD +)
Operational Risk Management

Antifraud policy, Insurance, Business continuity plans, estimations of operational losses, …
MFF UK – March 9, 2012
page 5
Risk Management / Zoom on KB organization


Universal Risk Management Function / OpRisk out of scope.
Matrix organization / One of largest Risk Management in the SG Group (330FTE).
SG RISQ
KB RISQ
A. Viry (L. Souček)
Credit Risk
Assessment
Corporate deal-flow
Capital
Markets
Risks
Market risk
Capital markets
Assets Valuation
& Recovery
Hard recovery
Collateral Evaluation
Risk
Information
Systems
Risk databasis
Supervision and
Measurement
Scoring models
Monitoring
Risk Methodology
Credit frauds
Functional links with SG RISQ departments
MFF UK – March 9, 2012
page 6
Risk Management / History of model development in KB

In-house score-card development since 1998 (IND, SB, Corp, Muni).

SG models used for sovereign and banks since 2002.

KB historical view:

1990 – 1997: Score-card developed by analysts (very simple expert models).

1997 – 1998: Score-card developed by statisticians (consumer loans, mortgages, corp).

2002 – 2003: Models implemented to the central rating system.

2001 – 2002: Behavioural scoring model developed (IND, SB).

2002 – 2005: Review of models with SG after acquisition.

2002 – 2007: Progressive usage of credit bureaus for retail (CBCB, SOLUS).

2005 – 2007: Implementation of Ba2 standards in KB (advanced methods for all credit portfolios).

2008 – 2011: Development and implementation of credit fraud prevention.
MFF UK – March 9, 2012
page 7
Risk Management / Key risks for the bank
CREDIT RISK
MONITORING / REPORTING
OPERATIONAL RISK
MARKET RISK
RECOVERY
3 DANGERS
NOT INTEGRATED CYCLE
LOW UNDERSTANDING
MODEL RISK
MFF UK – March 9, 2012
page 8
Credit Risk / Key elements PD, LGD, EaD



Expected Loss (EL) = EaD * 1Y PD * LGD
Risk Weighted Assets (RWA) = RW * EaD





1Y PD = Probability of Default during following 1Y
LGD = Loss Given Default
EaD = Exposure at Default
RW = Risk Weight
RWA = Risk Weighted Assets
RW = Function (PD, LGD, Maturity, Regulatory correlation, Regulatory interval of conf. 99.9%)
Actual Exposure = On B/S + Off B/S
Exposure at Default (EaD) = On B/S + Off B/S * CCF
Off B/S
CCF
LGD
Recovered cash
On B/S
Non-Default, PD < 100%
Default, PD= 100%
“90DPD or unlikely to pay”
MFF UK – March 9, 2012
Recovery process
page 9
Credit Risk / Ability to absorb a loss
Bank Capital
CAR =
> 8%
FREQUENCY OF LOSSES
Market Risk RWA + Credit Risk RWA + Operational Risk RWA

CAR = Capital Adequacy Ratio

Regulatory minimum at 8%

Unexpected Loss as a variation of Expected Loss
Probability
99,9%
Stress
Testing
Probability
0,1%
Expected Loss
covered by revenues
SIZE OF LOSSES
Unexpected Loss
covered by the capital
MFF UK – March 9, 2012
Extreme Loss
!!! DEFAULT !!!
page 10
Credit Risk / Credit portfolios per PD & LGD

Expected Loss (given by PD and LGD) is reflected in pricing.
55%
50%
Consumer loans
Credit Cards
45%
Loss Given Default
RE Developers
40%
Project finance
Client rate: 3,5%
Small Business
Net margin
1,0%
Large corporates
35%
Banks
30%
Expected Loss
SME
0,5%
25%
20%
PSE
15%
Cost of funds
2,0%
Residential mortgages
Sovereigns
10%
-1%
0%
of4%
Default 5%
1% 12 Month
2% Probability
3%
MFF UK – March 9, 2012
6%
7%
page 11
Credit Risk / Corporates / Rating Model


Individual assessment is prevailing.

Financial assessment (financial data)

Economic assessment (position in market, …)
Model rating revised by credit analyst.
Financial Rating
Behavioural Rating
Economic Rating
Model Rating
Credit analyst
Final Obligor Rating
MFF UK – March 9, 2012
Rating scales for non-retail
Moody’s
Aaa
Aa1
Aa2
S&P
AAA
AA+
AA
1Y PD
0,01%
0,01%
0,02%
Country
DE, USA, FR (M)
FR (S&P)
BE, SI
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
0,03%
0,03%
0,04%
0,06%
0,13%
0,26%
0,50%
1,10%
2,12%
3,26%
4,61%
7,76%
11,42%
IT, JP
CZ, SK, CN
PL
Caa1
CCC+
Caa2
CCC
Caa3
CCCDefault
14,33%
20,44%
27,25%
100,00%
RU, BR
HU, RO
BUL
UA
GR
page 12
Credit Risk / Retail / Granting process


Maximally automated (95% of approvals) / Maximally parameterized / Maximally centralized.
Data collection / Independent verification / Assessment by statistical model.
DATA COLLECTION (COMPLEX INFORMATION ABOUT CLIENT)
APPLICATION FORM
(DEMOGRAPHIC DATA)
INTERNAL BANK DATA
(BEHAV. DATA)
CREDIT REGISTERS
(CREDIT HISTORY)
TRANSACTION
PARAMETERS
COLLATERAL
CREDIT ANTIFRAUD SYSTÉM (IDENTITY, EMPLOYER, DATA)
SCORING MODEL
(YES / NO)
INSTALLMENT LIMIT
(YES / NO)
MFF UK – March 9, 2012
COLLATERAL EVALUATION
(YES / NO)
page 13
Credit Risk / Retail / Scoring Model
MAIN DRIVER OF PREDICTING POWER
Behavioural Model
(data in the bank)
IN KB SINCE 2002
• Basic Behavioural SM (Bank)
• Complex Behavioural SM (Group)
• Advanced Behavioural SM
• Advanced Application SM
Behavioural Models
(data in subsidiaries)
IN KB SINCE 2007
Application rating
Credit Register Model
(data from the register)
IN KB SINCE 2006
3 KEY ADVANTAGES
 High predicting power.
Demographic Model
(application form)
IN KB SINCE 1998
 Complex assessment.
 High flexibility (4 boxes).
MFF UK – March 9, 2012
page 14
Credit Risk / Retail / Scoring Model
3 KEY ADVANTAGES
3 KEY RISKS
 Fast and easy process
 No view of expenditures
 High volume of production
 Limited assessment
 Top quality of production
 Change of behaviour
1 200 ths. clients
EUR 6 400M
300 ths. clients EUR 1
200M
80 ths. clients
EUR 32M
2002
170 ths. clients EUR
400M
2004
2006
2011
PRODUCTS
AO
AO, CL, CC
AO, CL, CC
AO, CL, CC
MAX LIMIT
EUR 400
EUR 2 400
EUR 6 000
EUR 10 000
KB
KB
KB
KB GROUP
CLIENTS
MFF UK – March 9, 2012
page 15
CONTACT
RNDr. Ing. Leoš Souček
Deputy Head of Risk Management
Komerční banka, a.s.
Tel: +420 222 435 141
Email: [email protected]
MFF UK – March 9, 2012
page 16