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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 because Triodos Bank has considerable expertise in these sectors and actively invests in increasing knowledge within the organisation. Risk is also reduced by the spread of the loan portfolio in the different countries and the high quality of securities (collateral) against outstanding loans. 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.

Credit Risk management

Triodos Bank’s basic and 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.
  • Lending only to clearly defined assets, activities or projects within each organisation.
  • Maintaining direct relationships with borrowers.
  • Lending primarily based on acceptable 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 N.V. 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. 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 a system that helps to identify problem loans ahead of time, when there may be more options available for remedial measures. Once the loan is identified as problem (e.g. overdue payments beyond 90 days), it is managed under a dedicated remedial process, with a focus on restructuring and 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 concerned 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 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 2012, the net additions to the provision for doubtful debts, as a percentage of the average loan portfolio, was 0.67% (2011: 0.63%). The total of provisions related to the outstanding credits is 1.7% (2011: 1.3%) as at the end of the year.

Loan risk is reported each month to the Executive Board Credit Committee, and quarterly to the Supervisory Board.

Governments and Financial institutions

Monies not invested in loans to customers are invested for liquidity purposes in bonds or placed with other banks. Triodos Bank’s policy is to invest in the country were the money is raised. 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 by the Triodos Research department. Exceptions can occur, if the number of selected banks in a country is not sufficient to place Triodos Bank’s liquidities. 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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
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

527,857

221,763

749,620

Regional governments and local authorities

246,879

40,171

287,050

95

Banks

786,344

–80,758

705,586

146,450

Corporates

2,292,452

–144,735

2,147,717

1,796,730

Retail exposures

94,696

–21,619

73,077

45,230

Secured by property

1,002,045

–4,741

997,304

721,764

Past due items

54,811

–10,081

44,730

59,037

Other items

65,433

65,433

65,433

 

 

 

 

 

 

 

 

 

 

Total

5,070,517

5,070,517

2,834,739

 

 

 

 

 

Whereof:

 

 

 

 

Assets

4,276,216

4,276,216

2,479,346

Off-balance sheet items

765,508

765,508

333,408

Derivatives

28,793

28,793

21,985

 

 

 

 

 

 

 

 

 

 

Total

5,070,517

5,070,517

2,834,739

 

 

 

 

 

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: 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;
  • 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

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

0

0

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
Amounts in thousands of EUR

Net exposure value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Banks and financial intermediation

990,203

20

247,372

9

25

Basic materials

19,008

18,419

1

97

Construction and infrastructure

1,412

667

47

Consumer products (non-food)

7,700

5,216

68

Retail

25,694

1

21,559

1

84

Services

404,536

8

317,095

11

78

Healthcare and social work

418,985

8

316,535

11

76

Agriculture and fishing

121,764

2

110,141

4

90

Media

6,908

5,175

75

Utilities

1,130,142

22

997,220

35

88

Public Administration

675,531

13

0

Private individuals

184,812

4

82,930

3

45

Technology

0

Leisure and tourism

93,667

2

81,307

3

87

Transport and logistics

9,941

9,464

95

Real estate

509,241

10

294,320

11

58

Insurance and pension funds

501

501

100

Food and beverages

74,084

2

62,014

2

84

Other sectors

396,388

8

264,804

9

67

 

 

 

 

 

 

 

 

 

 

 

 

Total

5,070,517

100

2,834,739

100

56

 

 

 

 

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
Amounts in thousands of EUR

Net exposure
value

%

Risk-weighted value

%

Average risk weight %

 

 

 

 

 

 

Australia

808

808

100

Belgium

1,088,326

21

545,694

19

50

Denmark

7,105

5,829

82

France

129,468

3

101,794

4

79

Germany

234,065

5

173,746

6

74

Ireland

61,090

1

58,859

2

96

Italy

3,394

3,394

100

Luxembourg

5,871

5,798

99

The Netherlands

2,075,951

41

865,454

31

42

Norway

132

131

99

Spain

653,036

13

572,284

20

88

Sweden

54

50

93

United Kingdom

809,791

16

499,479

18

62

United States

1,422

1,419

100

Other countries

4

 

 

 

 

 

 

 

 

 

 

 

 

Total

5,070,517

100

2,834,739

100

56

 

 

 

 

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
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

63,991

10,000

50,645

300,958

102,263

527,857

Regional governments and local authorities

1,927

95,000

60,000

45,993

43,959

246,879

Banks

392,912

138,382

192,493

51,858

2,000

777,645

Corporates

77,594

51,291

119,884

460,268

896,119

1,605,156

Retail exposures

6,097

1,122

2,209

7,830

43,993

61,251

Secured by property

24,397

6,670

33,009

172,064

701,044

937,184

Past due items

30,837

535

1,604

10,936

10,899

54,811

Other items

65,433

65,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

663,188

303,000

459,844

1,049,907

1,800,277

4,276,216

 

 

 

 

 

 

 

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 for more than 90 days.

Bad debts and overdue receivables per sector

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
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

225

185

–895

Construction and infrastructure

87

74

52

51

Consumer products (non-food)

316

93

97

Retail

824

502

–28

48

Services

12,254

1,276

144

2,436

Healthcare and social work

11,571

1,561

1,045

15,591

Agriculture and fishing

22,921

6,417

2,474

7,251

Media

111

82

70

Utilities

29,764

16,171

6,973

1,566

Private individuals

105

Leisure and tourism

10,574

4,703

3,082

2,668

Transport & logistics

51

45

Real Estate

2,096

57

11

Food and beverages

1,912

859

442

4,225

Other sectors

11,348

4,558

2,404

1,467

 

 

 

 

 

 

 

 

 

 

Total

104,054

36,583

15,801

35,478

 

 

 

 

 

Bad debts and overdue receivables per country

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011
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

20,888

13,424

5,798

1,066

France

1

Germany

5,951

1,248

775

11,681

Ireland

800

380

–18

1,455

The Netherlands

59,741

16,744

7,765

2,562

Spain

9,289

2,129

518

15,131

United Kingdom

7,385

2,658

963

3,582

 

 

 

 

 

 

 

 

 

 

Total

104,054

36,583

15,801

35,478