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  • Credit Risk
  • Market Risk
  • Liquidity Risk
  • Credit Risk

    Credit Risk loan book

    Credit risk is the risk that a counterparty doesn't fulfil its financial obligations. Triodos Bank manages its Credit Risk at a client and at a portfolio level. It operates within a pre-defined set of criteria for accepting credits. Credits are extended within the target markets and lending strategy in accordance with Triodos Bank’s mission and expertise. Before accepting a credit facility, Triodos Bank makes an assessment of the customer’s risk profile, cash flows, available collateral and the requested transaction, including an assessment of the integrity and reputation of the borrowers or counterparty. Compliance analysis with Triodos Lending Criteria is an integral part of each credit proposal.

    In order to manage credit risk Triodos Bank developed an internal rating based system, resulting in a probability of default. Furthermore Triodos Bank has developed loss given default, allowing us to calculate the expected loss and the economic capital under the advanced approach.

    Obligor Risk

    An obligor is a single legal entity that commits to the terms and conditions of a loan agreement. The obligor is thoroughly analysed from meeting Triodos Bank’s lending criteria to its capacity to repay a loan. The risk related to the obligor is that it fails to meet its contractual obligations. Obligors are rated through an internal rating methodology system.

    A thorough assessment of each obligor and the structure of their loan is made before any loan is provided. A review of approved credit is made once a year at a minimum to assess the evolution of the client’s capacity to meet its obligations. The high quality of securities (collateral) against outstanding loans reduces credit risk. Principal collateral are for example: 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.

    Triodos Bank aims to finance specific projects and assets that are in line with the bank’s mission. When financing a project, the bank has a pledge on the underlying contracts. For the financing of objects, the bank will take a pledge or mortgage on the specific object. The bank applies haircuts, in all cases, on the market value. The level of this haircut will depend on the marketability of the asset in a negative scenario. This allows Triodos Bank to make a proper assessment of the overall risk of the loan and the value of the asset in case of a downturn. The value of the collateral is reviewed on a yearly basis and for large loans with a mortgage, an external valuation by an expert will be requested at a minimum every three years.

    Triodos Bank has an early warning system that helps identify problem loans early, to allow for more available options and remedial measures. Once a loan is identified as being in default (unlikelyness to pay or overdue payments beyond 90 days), it is managed under a dedicated remedial process, with a focus on full recovery.

    Group Exposures

    The risk related to a Group is that if one obligor fails to meet its contractual obligations, so will the remaining obligors within the Group. A group is defined as two or more obligors that are interrelated in such a way that they are considered as a single risk.

    Each obligor of the Group, and the Group as a whole, are analysed on all aspects, from meeting Triodos Bank’s lending criteria and to their capacity to repay the loan.

    Concentration Risk loan book

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

    A diversified credit risk portfolio is the result of assets spread over many debtors, sectors and geographies that are not interrelated. In order to manage concentration risks and face an economic downturn with confidence, Triodos Bank maintains a set of limits. It measures and limits the following concentration risks in its lending activities: obligor exposures; group exposures; top 20 exposures (excluding central and lower government exposures); government exposures; exposures at sector per country; mortgage exposures; and country exposures.

    Besides lending activities, Triodos Bank has established limits related to the investment portfolio concerning central banks, governments, supranational institutions and banks and financial institutions. These limits are derived from the risk appetite framework and aim to keep concentration risk at an acceptable level.

    From a regulatory perspective, exposures to a group of connected clients may never exceed 25% of the Actual Own Funds. Loans in excess of 10% of the Actual Own Funds require special reporting to the supervisory authority.

    Triodos Bank has in its loanbook no loans to a group of connected clients exceeding 10% of the Actual Own Funds. (Limits of the investment portfolio are described in the relevant chapters.)

    Sector concentrations

    Triodos Bank is active in well defined sectors where it has extensive expertise and which are in line with its mission. It has set limits on sectors, based on Actual Own Funds, at group and branch level. Sector studies have shown relatively low correlations of risk drivers in sectors that Triodos Bank finances in multiple countries.

    At group level, Triodos Bank divides the sector concentration limits in different levels. Specific limits for each sector per country are set by the Executive Board within these levels, taking into account the specific risks of each sector and country.

    Larger sectors are strategic for Triodos Bank. These are well distributed across branches (and countries) and have an overall low risk profile that justifies a higher consolidated concentration. Sector analyses are performed on an annual basis and are presented to the Central Credit Committee to be able to respond swiftly to developments that may affect the risk profile of the portfolio. Central Credit Risk can request sector updates at shorter intervals if there is a change to a sector risk profile.

    Sector limits are approved on the basis of thorough annual sector analyses demonstrating an in depth knowledge of the sector and Triodos Bank’s track record.

    Country concentrations

    Triodos Bank is a European bank, acting under the European Banking Directive since 1993, with branches in five countries (The Netherlands, Belgium, United Kingdom, Spain and Germany) and with additional exposures amongst others in France and Ireland.

    Triodos Bank does not set any country limits for the countries it operates in as long as these countries have a credit rating of AA- or better. Specific limits are defined for countries with a credit rating of A+ or lower.

    Bad debts and loan loss provisions

    All business loans in the portfolio are periodically reviewed on an individual basis. Their frequency depends on the debtor’s creditworthiness, the degree of market exposure and the market in which the debtor operates. Private loans are reviewed at portfolio level, and on individual basis if appropriate. The credit committee of a 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 instalments for a prolonged period, this debtor falls under the category of doubtful debtors and will be managed intensively.

    Provisions for loan losses are taken for doubtful debtors at an individual level 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. These individual provisions include provisions for concessions or refinancing given to debtors who face financial difficulties. They are only granted to the debtor in question in order to overcome their difficulties in these exceptional circumstances. These are described as forbearance measures.

    A collective credit provision has been taken for Incurred But Not Reported bad debts (the IBNR) to cover the time lag between the event that prompts the debt to qualify as doubtful and the moment that fact is known to Triodos Bank. This is a collective credit provision and is based on statistics. The IBNR is calculated by multiplying the exposure at default with the probability of default, the loss given default and the loss incubation period. In 2016, in view of the growing mortgage portfolio, Triodos Bank has added an IBNR provision for mortgages. Triodos Bank portfolio has no specific provisions of any relevance in its mortgage loan portfolio and has therefore chosen to use market statistics to define this additional provision.

    In 2016, the net additions to the provision for doubtful debts, as a percentage of the average loan portfolio, was 0.10% (2015: 0.16%). The total of provisions related to the outstanding credits is 1.0% (2015: 1.3%) as at the end of the year.

    The credit risk in the loan portfolio is reported each month to the Central Credit Committee, and quarterly to the Audit and Risk Committee as part of the ERM report.

    Bad debts and past due receivables

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

    Bad debts are impaired loans that Triodos Bank expects 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 future expected cash flows, discounted at the original effective interest rate of the contract. Past due receivables in these tables are loans overdue in excess of 90 days.

    Movements bad debts

    Download XLS

     

     

     

    in thousands of EUR

    2016

    2015

     

     

     

     

     

     

    Balance sheet value as at 1 January

    186,249

    189,664

    Classified as bad debt during the year

    17,317

    36,762

    Interest charged on bad loans

    2,571

    3,924

    Release of bad loans / transfer to not impaired

    –32,233

    –18,740

    Bad loans written off

    –14,734

    –13,089

    Repayments

    –6,244

    –13,138

    Exchange rate result

    –2,301

    866

     

     

     

     

     

     

    Balance sheet value as at 31 December

    150,625

    186,249

     

     

    Bad debts and past due receivables per sector

    Download XLS

     

     

     

     

     

    2016
    in thousands of EUR

    Bad debts
    at year end

    Provision for bad debts at year end

    Value adjustments in the year

    Past due receivables (excl. Bad debts) at year end

     

     

     

     

     

     

     

     

     

     

    Basic materials

    9,209

    2,820

    417

    2

    Building materials

    304

    Construction and infrastructure

    66

    Consumer products (non-food)

    6,996

    1,139

    –1,625

    2

    Retail

    1,438

    650

    338

    165

    Services

    15,828

    2,969

    –600

    201

    Healthcare and social work

    30,931

    7,641

    2,952

    1,299

    Agriculture and fishing

    20,870

    10,180

    205

    4,760

    Media

    2,590

    425

    135

    391

    Utilities

    12,885

    6,361

    –176

    2

    Private individuals

    1,261

    310

    182

    3

    Leisure and tourism

    23,942

    10,202

    1,344

    1,385

    Transport & logistics

    1,737

    38

    38

    32

    Real Estate

    3,750

    1,193

    2

    2,319

    Food and beverages

    7,079

    6,019

    112

    1,581

    Other sectors

    12,109

    7,103

    2,387

    5,931

     

     

     

     

     

     

     

     

     

     

    Total

    150,625

    57,050

    5,711

    18,443

     

     

     

     

    Download XLS

     

     

     

     

     

    2015
    in thousands of EUR

    Bad debts
    at year end

    Provision for bad debts at year end

    Value adjustments in the year

    Past due receivables (excl. Bad debts) at year end

     

     

     

     

     

     

     

     

     

     

    Basic materials

    12,673

    2,432

    324

    Consumer products (non-food)

    278

    131

    –23

    Retail

    1,018

    432

    23

    6

    Services

    31,115

    4,146

    –215

    1,123

    Healthcare and social work

    31,460

    4,994

    1,466

    2,362

    Agriculture and fishing

    21,637

    10,172

    –2

    9,795

    Media

    7,047

    354

    –331

    322

    Utilities

    21,777

    18,605

    –660

    2,703

    Private individuals

    940

    127

    126

    18

    Leisure and tourism

    28,672

    10,213

    2,473

    535

    Transport & logistics

    55

    Real Estate

    3,839

    1,191

    667

    1

    Food and beverages

    7,172

    6,165

    1,609

    1,414

    Other sectors

    18,621

    9,089

    2,122

    4,656

     

     

     

     

     

     

     

     

     

     

    Total

    186,249

    68,051

    7,579

    22,990

     

     

     

     

    Bad debts and past due receivables per country

    Download XLS

     

     

     

     

     

    2016
    in thousands of EUR

    Bad debts
    at year end

    Provision for bad debts at year end

    Value adjustments in the year

    Past due receivables (excl. Bad debts) at year end

     

     

     

     

     

     

     

     

     

     

    Belgium

    10,280

    4,282

    378

    443

    Germany

    7,872

    5,216

    251

    418

    Ireland

    3,052

    742

    –99

    922

    The Netherlands

    79,334

    34,160

    2,144

    1,356

    Spain

    39,577

    9,772

    3,019

    12,026

    United Kingdom

    10,510

    2,878

    18

    3,278

     

     

     

     

     

     

     

     

     

     

    Total

    150,625

    57,050

    5,711

    18,443

     

     

     

     

    Download XLS

     

     

     

     

     

    2015
    in thousands of EUR

    Bad debts
    at year end

    Provision for bad debts at year end

    Value adjustments in the year

    Past due receivables (excl. Bad debts) at year end

     

     

     

     

     

     

     

     

     

     

    Belgium

    10,691

    4,223

    1,101

    73

    Germany

    7,220

    5,091

    461

    1,105

    Ireland

    3,247

    870

    –81

    944

    The Netherlands

    103,471

    45,014

    3,219

    2,260

    Spain

    47,724

    8,515

    2,459

    12,920

    United Kingdom

    13,896

    4,338

    420

    5,688

     

     

     

     

     

     

     

     

     

     

    Total

    186,249

    68,051

    7,579

    22,990

     

     

     

     

    Credit risk investment portfolio

    Liquidity not invested in loans to customers is invested in deposits with banks (including Central Banks) or bonds. Triodos Bank’s policy is to invest the liquidity in the countries where it has branches. The bond portfolio of Triodos Bank comprises of (local) government bonds (from countries where Triodos Bank has a branch) and investment grade bonds issued by European supranational organisations (e.g. European Investment Bank), Financial Institutions and corporates.

    There are no regulatory restrictions to exposures on governments. Triodos Bank sets limits based on the country risk.

    There are also no regulatory restrictions to exposures on supranational organisations as far as an institution has a credit risk weight of 0%. Triodos Bank has set limits to avoid concentration risk in exposures on supranational organisations.

    Credit risk banks

    Banks are selected on the basis of their creditworthiness and screened on their sustainability performance. Exceptions can occur, when the capacity of selected banks in a country is considered not sufficient to place Triodos Bank’s liquidities using a certain maximum concentration per individual bank. In such cases, deposit maturity periods will not exceed three months. All counterparty limits for banks are set by either the Executive Board or the Central Credit Committee.

    Branches place excess liquidity with the country’s central banks (minimum reserve requirements and deposit facility). There are no regulatory restrictions on exposures to Central Banks.

    The Capital Requirements Regulation Large Exposures Regime limits the maximum exposure to a bank at 25% of its Tier 1 capital plus (if available) Tier 2 with a maximum of one third of Tier 1 capital. To avoid the interbank exposure exceeding the regulatory maximum, Triodos Bank applies a maximum exposure below the limit based on the Large Exposures Regime. The limits are furthermore adapted to the external rating of the counterparty and also deposits on banks are limited to a maximum maturity of one year.

    Credit risk related to derivatives

    Triodos Bank has exposure to credit risk resulting from outstanding Foreign Exchange (FX) contracts (spot, forward and swap transactions) with Financial Institutions and with funds managed by Triodos Investment Management. Triodos Bank services these funds by providing hedges for the foreign exchange risk of these funds’ investments.

    Triodos Bank has limited exposure to credit risk resulting from outstanding Interest Rate Swaps (IRS). The IRS are all centrally cleared with the LCH Clearnet. The daily margining minimises the (potential) credit risks.

    Overview of derivates exposure value

    Download XLS

     

     

     

    Derivates
    in thousands of EUR

    2016

    2015

     

     

     

     

     

     

    Gross positive fair value currency forward contracts

    36,113

    38,809

    Gross positive fair value Interest Rate SWAPs (IRS)

    Netting benefits

    Netted current credit exposure

    21,643

    13,455

    Collateral held

     

     

     

     

     

     

    Net derivatives credit exposure

    57,756

    52,264

     

     

     

    Current replacement cost

    36,113

    38,809

    Potential future credit exposure

    21,643

    13,455

     

     

     

     

     

     

    Exposure value

    57,756

    52,264

     

     

    The exposure value of the currency forward contracts is calculated with the mark-to-market method. The exposure value is the sum of current replacement cost and the potential future credit exposure. The current replacement cost is equal to the current market values of all contracts with positive values. The potential future credit exposure is determined by multipling the notional amounts with prescribed percentages.

    A limit is set per counterparty based on the expected amount of outstanding FX transactions and the corresponding expected exposure, as calculated by the method above. This limit is subject to the overall counterparty limit Triodos Bank has per counterparty.

    Any collateral needed for FX transactions is calculated and managed daily. In the liquidity stress tests the amount of collateral needed for FX transactions is stressed in order to calculate the potential impact on Triodos Bank’s liquidity position.

    Wrong-way risk is the risk that the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. Triodos Bank enters into FX deals with Triodos Investment Funds and these deals are hedged by deals with a few banks. The FX deals with the Triodos Investment Funds do not cause wrong-way risk as these FX deals hedge the FX risk of the underlying assets of the Investment Funds. In addition, the wrong-way risk of transactions with banks is mitigated by only using banks with a sufficient credit rating and by having collateral agreements in place.