Financial risk is an umbrella term for multiple types of risk associated with financing the balance sheet. To manage this, financial risk is subdivided in three categories: credit risk, liquidity risk and market risk.

Credit risk

Credit risk management

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 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 assesses 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 a loss given default model, allowing us to model the expected loss and the economic capital.

Credit risk organisational structure

Each branch has a credit risk team headed by a Head of Credit Risk. The teams comprise credit risk analysts and Special Asset Managers. They have a functional reporting line to the Central Head of Credit Risk at Head Office. At central level a dedicated team is in place with credit analysts, data analysts and special asset management specialists.

At local level, individual files have a second line review and the portfolio is monitored and reviewed on a continuous basis. The larger files based on exposure and rating, are furthermore analysed at central level. The aggregated portfolio is also monitored at central level.

The resulting analysis is provided to the local and/or central credit committee for decision making on approvals for individual files, lending criteria for sectors and limits on sectors, countries or individual obligors.

Concentration risk

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.

Triodos Bank focus primarily on the quality and diversification of its loan portfolio. We put extra effort into identifying loans to front-runners in their fields; the entrepreneurs developing the sustainable industries of the future.

A diversified credit risk portfolio is the result of assets spread over many debtors, sectors and geographies that are not inter- or intra-related. In order to manage concentration risks and face an economic downturn with confidence, Triodos Bank maintains a set of limits. The limits are based on the bank’s capital base and reflect the risk appetite. This policy describes the different kind of credit concentrations identified and the limit setting.

Triodos Bank measures and limits the following concentration risks in its lending activities:

  • Obligor exposures

  • Group exposures

  • Top 20 exposures excluding (sub-)Government exposures

  • Government exposures

  • Sector exposures

  • Non-Bank Financial Intermediation (Shadow banking) exposures

  • Mortgage exposures

  • Country exposures

Besides lending activities, Triodos Bank has established limits related to the investment portfolio:

  • Maximum exposure on government and sub-governments

  • Maximum exposure on supranational institutions

  • Maximum exposure on banks and financial institutions

The limit setting is derived from the risk appetite framework and aims to keep concentration risk at an acceptable level.

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 banking entity level. Sector studies have shown relatively low correlations of risk drivers in sectors that Triodos Bank finances in multiple countries. A specification of the lending by sector can be found from page Lending by sector in 2020 after intercompany eliminations onwards.

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 banking entities (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 banking entities in four countries (The Netherlands, Belgium, Spain and Germany), with a subsidiary in the United Kingdom 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.

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 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 a loss given default model, allowing us to model the expected loss and the economic capital.

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 on meeting Triodos Bank’s lending criteria and 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.

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, as 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. Examples of principal collateral: 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 its mission. When financing a project, the bank has a pledge on the underlying contracts. For the financing of objects, Triodos Bank will take a pledge or mortgage on the specific object. It 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. An external valuation by an expert is requested, at a minimum every three years, for large loans with a mortgage.

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 (unlikeliness 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 to their capacity to repay the loan.

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 or subsidiaries. The bond portfolio of Triodos Bank comprises of (local) government bonds (from countries where Triodos Bank has a branch or subsidiary) 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 multilateral development banks as far as an institution has a credit risk weight of 0% for regulatory capital requirements. Triodos Bank has set limits to avoid concentration risk in these exposures.

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. Banking entities 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.

A limit is set per counterparty based on the expected amount of outstanding FX transactions and the corresponding expected exposure. 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.

Triodos Bank entered into FX deals with Triodos Investment Funds and these deals are hedged by deals with a few banks. Wrong-way risk is the risk that the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. 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. At the end of 2017 Triodos Bank stopped entering into new FX deals with Triodos Investment Funds because of new regulation. 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.

Additional disclosure related to the credit quality of assets

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. Small business and private loans are reviewed at portfolio level, and on individual basis if appropriate.

Each branch has a credit risk team headed by a Head of Credit Risk. The teams comprise credit risk analysts and Special Asset Managers. They have a functional reporting line to the Central Head of Credit Risk at Head Office. At central level a dedicated team is in place with credit analysts, data analysts and special asset management specialists.

The credit committees discuss and, if necessary, take 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.

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.

Qualitative disclosure requirements on institutions’ use of external credit ratings under the standardised approach for credit risk.

In addition to our check on minimum standards, external credit ratings – if available – are used to determine the credit worthiness of the counterparties of our investment portfolio and banks, and for a few corporates. External ratings are also used for calculating the minimum capital requirement for credit risk under the standardised approach. For this purpose, we use the ratings of Fitch and Moody’s.

Credit risk quantitative disclosures

Credit quality analysis

The following tables set out information about the credit quality of financial assets, loan commitments and guarantee contracts. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. For loan commitments and financial guarantee contracts, the amounts in the table represent the amounts committed or guaranteed, respectively.

The following table shows the loans and advances to banks at amortised cost, which are all in stage 1.

 

2020

2019

Loans and advances to banks at amortised cost

Stage 1

Stage 1

 

 

 

Gross amount

150,581

227,633

allowance for expected credit losses

-18

-42

 

 

 

Carrying amount

150,563

227,591

Triodos Bank applies ratings to its loans and advances to customers based on its credit risk policy. Within the policy clients with total business loans above EUR 250 thousand are rated. Clients with retail mortgage loans and or total business loans below EUR 250 thousand have no rating appointed. These are represented in the not rated category. The below table shows the loans and advances to customers within the rating categories.

 

2020

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Rating 1-9: Normal risk

5,315,917

611,226

-

5,927,143

Rating 10-13: Increased risk

39,664

119,416

-

159,080

Rating 14: Default

-

-

214,649

214,649

Not rated

2,697,674

209,134

-

2,906,808

 

 

 

 

 

Gross amount

8,053,255

939,776

214,649

9,207,680

allowance for expected credit losses

-8,148

-9,384

-33,438

-50,970

 

 

 

 

 

Carrying amount

8,045,107

930,392

181,211

9,156,710

 

2019

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Rating 1-9: Normal risk

5,221,112

126,178

-

5,347,290

Rating 10-13: Increased risk

55,990

88,815

-

144,805

Rating 14: Default

-

-

190,836

190,836

Not rated

2,018,922

540,940

-

2,559,862

 

 

 

 

 

Gross amount

7,296,024

755,933

190,836

8,242,793

allowance for expected credit losses

-4,475

-1,000

-28,304

-33,779

 

 

 

 

 

Carrying amount

7,291,549

754,933

162,532

8,209,014

The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2 and 3.

 

2020

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Current

8,050,729

285,271

-

8,336,000

Overdue < 90 days

2,526

654,505

-

657,031

Overdue > 90 days

-

-

214,649

214,649

 

 

 

 

 

Total

8,053,255

939,776

214,649

9,207,680

 

2019

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Current

7,259,658

739,613

-

7,999,271

Overdue < 90 days

36,366

16,320

-

52,686

Overdue > 90 days

-

-

190,836

190,836

 

 

 

 

 

Total

7,296,024

755,933

190,836

8,242,793

All debt securities at amortised cost are within stage 1 The below table sets out the debt securities per rating.

 

2020

2019

Debt securities at amortised cost

Stage 1

Stage 1

 

 

 

AAA

67,941

177,102

AA

390,372

425,926

A

428,501

55,894

BBB

430,550

375,403

allowance for expected credit losses

-63

-34

 

 

 

Carrying amount

1,317,301

1,034,291

Loan commitments are not (yet) rated and the ECL is determined based on the business loans and mortgage loans portfolios. The outcome is presented in the table below.

 

2020

Loan commitments

Stage 1

Stage 2

Total

 

 

 

 

Gross carrying amount

1,301,301

141,622

1,442,923

allowance for expected credit losses

-1,025

-1,209

-2,234

Carrying amount (provision)

-1,025

-1,209

-2,234

 

2019

Loan commitments

Stage 1

Stage 2

Total

 

 

 

 

Gross carrying amount

943,411

177,216

1,120,627

allowance for expected credit losses

-570

-107

-677

Carrying amount (provision)

-570

-107

-677

All financial guarantee contracts are within stage 1 as shown in the table below.

 

2020

2019

Financial guarantee contracts

Stage 1

Stage 1

 

 

 

Gross carrying amount

41,009

75,901

allowance for expected credit losses

-14

-19

Carrying amount (provision)

-14

-19

Cash and cash equivalents Triodos Bank held cash and cash equivalents of €2.956 million at 31 December 2020 (2019: €2.270 million). The cash and cash equivalents are held with central banks.

Collateral held and other credit enhancements

Triodos Bank can hold collateral and other credit enhancements against certain of its credit exposures. The following table sets out the principal types of collateral held against different types of financial assets.

 

Percentage of exposure that is subject to collateral requirements

 

2020

2019

Principal type of collateral held

 

 

 

 

 

 

Non trading derivatives

100

100

Cash Collective

 

 

Loans and advances to customers

 

 

 

 

 

Mortgage lending

97

96

Residential Property

 

 

Business lending

61

76

Commercial Property, Other

 

 

Current accounts

-

-

None

 

 

The following tables stratify credit exposures from mortgage loans and advances to retail customers by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan – or the amount committed for loan commitments – to the value of the collateral. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral for residential mortgage loans is based on the collateral value at origination updated based on changes in house price indices. For credit-impaired loans the value of collateral is based on the most recent appraisals.

LTV ratio

2020

2019

 

 

 

Less than 65%

1,400,205

978,172

65-75%

338,468

405,268

75-90%

458,956

218,329

More than 90%

542,301

375,406

 

 

 

Total residential mortgage lending

2,739,930

1,977,175

Details of financial and non-financial assets obtained during the year by taking possession of collateral held as security against loans and advances and held at the year end are shown below.

Triodos Bank sometimes repossesses assets which come from acquisition in public auctions. These assets are collaterals of an executed loan. A part of the repossessed assets however will not be sold immediately because Triodos Bank has opted to add value by letting these assets and are therefore presented as investment properties.

Allowance for expected credit losses

The following tables show reconciliations from the opening to the closing balance of the allowance for expected credit losses by class of financial instrument.

Triodos Bank uses three stages to classify the expected credit loss (hereafter “ECL”) for financial instruments. Stage 1 includes the financial instruments that have (close to) similar credit risk since origination. For this category the ECL is determined by looking forward for 12 months. Stage 2 includes the financial instruments which have had a significant increase in credit risk since origination. The ECL for stage 2 is determined looking over the entire lifetime of the financial instrument. The ECL for stages 1 and 2 is determined by the PD, LGD and EAD per exposure, which are determined with the use of a model that includes several drivers. These drivers can be client specific or based on macro-economic scenarios. Stage 3 includes the financial instruments which are in default. The ECL for this stage is also determined over the entire lifetime, considering default specific scenarios.

The ECL provision represents an estimate of the expected credit loss. The future development of the underlying parameters can influence this estimate positively (or negatively) leading to a decrease (or increase) of expected credit losses in future periods. If economic growth is expected to develop positively in future periods, this will have a positive effect on the calculation of ECL and result in lower ECL provision for stage 1 and 2.

Net portfolio growth captures all additions and full loans repayments. New loans are initially included in Stage 1. Additions in Stage 2 are caused increases in loans already in Stage 2 or sector overlays for significant increases in credit risk. Changes in ratings of clients may trigger classifications into different categories. When a rating declines significantly, the loan is transferred from Stage 1 to Stage 2, if the decline persists the loan can go into default and is subsequently moved into Stage 3. Furthermore, the defaults may be cured, and credit ratings may go up, such that loans can be transferred back to Stage 2 or Stage 1. The changes in stages is represented in the transfers.

When the drivers of the PD and LGD are changed, ECL amounts per financial instrument are recalculated. This is captured in the net remeasurement of allowance for expected credit losses. The net remeasurement can be broken down into several items: (1) Remeasurement in calculated ECL of individual loans which have transferred between stage 1 and stage 2. (2) Changes in forward looking macro-economic scenarios. (3) Updates and refinements of the used ECL model. And, (4) changes in individual loan or advance behaviour such as changes in rating not triggering stage transfer or loan amount due to repayment.

Loans and advances to banks at amortised cost have no changes in rating, and therefore credit risk, from issuance of current outstanding balance and therefore everything is within stage 1.

ECL loans and advances to banks at amortised cost

2020

2019

 

 

 

Balance at 1 January

42

42

Transfer to Stage 1

-

-

Transfer to Stage 2

-

-

Transfer to Stage 3

-

-

Net remeasurement of allowance for expected credit losses*

-24

2

Net portfolio growth

-

-2

 

 

 

Balance at 31 December

18

42

* The allowance for expected credit losses in these tables includes ECL on loan commitments for certain retail products such as credit cards and overdrafts, because the Group cannot separately identify the ECL on the loan commitment component from those on the financial instrument component.

The following table shows the movements within the ECL for business loans and current accounts.

 

2020

ECL loans and advances to customers at amortised cost - Business loans and current accounts

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balance at 1 January

4,102

828

28,011

32,941

Transfer to Stage 1

237

-237

-

-

Transfer to Stage 2

-316

316

-

-

Transfer to Stage 3

-59

14

45

-

Net remeasurement of allowance for expected credit losses

1,796

7,000

10,002

18,798

of which:

 

 

 

 

- Effect of transition between stages

-1,420

5,264

-

3,844

- Macro-economic forward looking impact

7,356

1,228

-

8,584

- Update ECL model

-36

-40

-

-76

- Individual loan or advance behaviour

-4,104

548

10,002

6,446

 

 

 

 

 

Net portfolio growth

1,545

1,202

-

2,747

Other transfers

-

-

-696

-696

Write-offs

-

-

-4,287

-4,287

Exchange rate differences

-18

-62

-103

-183

 

 

 

 

 

Balance at 31 December

7,287

9,061

32,972

49,320

The allowance for expected credit losses in this table includes ECL on off balance loan commitments for certain retail products such as credit cards and overdrafts, because Triodos Bank cannot separately identify the ECL on the loan commitment component from those on the financial instrument component.

 

2019

ECL loans and advances to customers at amortised cost - Business loans and current accounts

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balance at 1 January

4,185

851

33,515

38,551

Transfer to Stage 1

57

1

-58

-

Transfer to Stage 2

-158

179

-21

-

Transfer to Stage 3

-34

25

9

-

Net remeasurement of allowance for expected credit losses

-767

-264

10,020

8,989

of which:

 

 

 

 

- Effect of transition between stages

-20

71

-

51

- Macro-economic forward looking impact

644

86

-

730

- Update ECL model

-

-

-

-

- Individual loan or advance behaviour

-1,391

-421

10,020

8,208

 

 

 

 

 

Net portfolio growth

819

36

-6,416

-5,561

Other transfers

-

-

-

-

Write-offs

-

-

-9,137

-9,137

Exchange rate differences

-

-

99

99

 

 

 

 

 

Balance at 31 December

4,102

828

28,011

32,941

The following table shows the movements within the ECL for mortgage loans.

 

2020

ECL loans and advances to customers at amortised cost – Mortgages

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balance at 1 January

373

169

296

838

Transfer to Stage 1

47

-47

-

-

Transfer to Stage 2

-

-

-

-

Transfer to Stage 3

-2

-11

13

-

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

111

132

157

400

of which:

 

 

 

 

- Effect of transition between stages

-46

2

-

-44

- Macro-economic forward looking impact

197

109

-

306

- Update ECL model

6

13

-

19

- Individual loan or advance behaviour

-46

8

157

119

 

 

 

 

 

Net portfolio growth

332

80

-

412

 

 

 

 

 

Balance at 31 December

861

323

466

1,650

 

2019

ECL loans and advances to customers at amortised cost – Mortgages

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Balance at 1 January

339

167

230

736

Transfer to Stage 1

-

-

-

-

Transfer to Stage 2

-

-

-

-

Transfer to Stage 3

-2

-18

20

-

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

-95

-20

46

-69

of which:

 

 

 

 

- Effect of transition between stages

-

19

-

19

- Macro-economic forward looking impact

-14

-8

-

-22

- Update ECL model

-

-

-

-

- Individual loan or advance behaviour

-81

-31

46

-66

 

 

 

 

 

Net portfolio growth

131

40

-

171

 

 

 

 

 

Balance at 31 December

373

169

296

838

The following table shows the movements within the ECL for debt securities at amortised cost.

 

2020

2019

ECL debt securities at amortised cost

Stage 1

Stage 1

 

 

 

Balance at 1 January

34

31

Net remeasurement of allowance for expected credit losses

6

9

Net portfolio growth

23

-

Foreign exchange and other movements

-

-6

 

 

 

Balance at 31 December

63

34

The following table shows the movements within the ECL for financial guarantees.

 

2020

2019

ECL financial guarantees

Stage 1

Stage 1

 

 

 

Balance at 1 January

19

91

Net remeasurement of allowance for expected credit losses

-5

-

Net portfolio growth

-

-

Foreign exchange and other movements

-

-72

 

 

 

Balance at 31 December

14

19

The following table shows the movements within the ECL for loan commitments.

 

2020

ECL loan commitments issued

Stage 1

Stage 2

Total

 

 

 

 

Balance at 1 January

570

106

676

 

 

 

 

Net remeasurement of allowance for expected credit losses

271

1,067

1,338

of which:

 

 

 

- Macro-economic forward looking impact

469

1,825

2,294

- Update ECL model

-4

-2

-6

- Individual commitment behaviour

-194

-756

-950

 

 

 

 

Net portfolio growth

184

35

219

 

 

 

 

Balance at 31 December

1,025

1,208

2,233

Loan commitments issued for the most significant part result in issued loan when offers are signed or when commitments are used. The table therefore shows the totals of the loan commitment ECL per stage.

 

2019

ECL loan commitments issued

Stage 1

Stage 2

Total

 

 

 

 

Balance at 1 January

678

119

797

 

 

 

 

Net remeasurement of allowance for expected credit losses

-96

-10

-106

of which:

 

 

 

- Macro-economic forward looking impact

55

5

60

- Update ECL model

-

-

-

- Individual commitment behaviour

-151

-15

-166

 

 

 

 

Net portfolio growth

-12

-3

-15

 

 

 

 

Balance at 31 December

570

106

676

Allowance for expected credit losses reconciliation to income statement

The following table provides a reconciliation between:

  • amounts shown in the above tables reconciling opening and closing balances of allowance for expected credit losses per class of financial instrument; and

  • the ‘impairment losses on financial instruments’ line item in the consolidated statement of profit or loss and other comprehensive income.

 

2020

Impairment losses on financial instruments

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Loans and advances to banks

-24

-

-

-24

Loans and advances to customers

3,723

8,414

10,221

22,358

Debts securities at amortised cost

29

-

-

29

Financial guarantees

-5

-

-

-5

Loan commitments issued

455

1,102

-

1,557

 

 

 

 

 

Impairment losses on financial instruments for the year

4,178

9,516

10,221

23,915

 

2019

Impairment losses on financial instruments

Stage 1

Stage 2

Stage 3

Total

 

 

 

 

 

Loans and advances to banks

1

-

-

1

Loans and advances to customers

-49

-21

3,582

3,512

Debts securities at amortised cost

3

-

-

3

Financial guarantees

-72

-

-

-72

Loan commitments issued

-108

-12

-

-120

 

 

 

 

 

Impairment losses on financial instruments for the year

-225

-33

3,582

3,324

Credit-impaired financial assets

The following table sets out a reconciliation of changes in the net carrying amount of credit- impaired loans and advances to customers.

 

2020

2019

 

 

 

Credit-impaired loans and advances to customers at 1 January

28,304

33,742

Addition

14,128

10,016

Write-off

-4,287

-9,137

Release

-3,908

-6,416

Other transfers

-696

-

Exchange rate differences

-103

99

 

 

 

Balance sheet value as at 31 December

33,438

28,304

Modified financial assets

The following table provides information on financial assets that were modified during the reporting period. The net modification loss comprises the modification result minus modification fees or penalty interest received.

 

2020

2019

Financial assets modified during the period

 

 

Amortised cost before modification

65,730

11,764

Net modification loss

7

34

Offsetting financial assets and financial liabilities

Triodos Bank does not make use of any netting under master agreements for its financial instruments.

The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties or following other predetermined events. In addition, Triodos Bank and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously.

Triodos Bank receives and gives collateral in the form of cash in respect of the derivatives held for risk management. This collateral is subject to standard industry terms including, when appropriate, an ISDA credit support annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.

The impact of potential collateral requirements is increasing at Triodos Bank. The amount pledged with central and commercial banks, for payment system purposes, increased in 2020 and is expected to increase with the further growth of Triodos Bank.

The collateral needs stemming from FX forwards decreased in 2020 because the FX forward portfolio of Triodos Bank decreased. At the end of 2020 total net amount of EUR 7.1 million cash collateral was posted (2019: EUR 16.4 million).

Interest Rate Swaps which are centrally cleared, increased the potential collateral needs as well during the year. At the end of 2020 total net amount of EUR 6.9 million cash collateral was posted (2019: EUR 9.3 million). This cash collateral is posted as part of the ISDA agreement as mentioned above, eligible for the counterparty in case of default.

Part of the value of debt securities at amortised is used as collateral for a possible debit balance, amounting to EUR 177.5 million at the Dutch Central Bank (2019: EUR 89.4 million). This will serve as collateral when Triodos Bank obtains a line of credit from the Dutch Central Bank and cover this line in case of default. Triodos Bank did not make use of this in 2019 and 2020.

Liquidity risk

Liquidity risk management

Triodos Bank only lends to and invests in sustainable enterprises in the real economy. Triodos Bank is not dependent on funding from the wholesale market. Funds are attracted from depositors and shareholders.

Triodos Bank does not invest in complex financial instruments. It has been this approach that enabled Triodos Bank to remain solid and stable in a time of market crisis but also to continue to grow steadily. The key factor to achieve this is to maintain healthy levels of liquidity. Triodos Bank has a large, good quality liquidity buffer resulting in solid liquidity and funding ratios. Triodos Bank does not act as correspondent bank which minimises liquidity needs during the day.

As a mid-sized European bank with total Funds Entrusted of EUR 11,747 million per the end of December 2020, liquidity risk is an important risk for Triodos Bank. The Bank has intensively worked on the development of a solid liquidity framework to have always sufficient funds to meet sudden and (un)expected short-term liquidity needs. The high cash liquidity buffer in combination with a high-quality investment portfolio, reflects the low risk appetite for liquidity risk. 

For its funding Triodos Bank mainly depends on funds entrusted from retail and business banking clients, consisting of current accounts, saving accounts and fixed term accounts.

The liquidity portfolio increased in 2020 due to the participation in the Targeted Longer-Term Refinancing Operation (TLTRO) of the Euro system to anticipate potential (temporary) higher credit demand from our clients. Our policy is to hold a sound liquidity buffer. Liquidity is invested within our minimum standards on sustainability, in highly liquid assets and (short-term) cash loans which count as inflow in the LCR 30 days before maturity, if the risk-return is more favourable than having the liquidity at the central banks. Around one third of the liquidity is invested, mainly in bonds and to a small extent in cash loans. The rest of the liquidity is mainly at the current account of the national central banks of our local entities and to some extent at sight with commercial banks to facilitate payments. The amount invested in (regional government) bonds (in Belgium and Germany) slightly increased due to favourable investment circumstances in Q2 2020. Most bonds qualify as high-quality liquid assets and are issued by central governments, regional governments and/or agencies in the Netherlands, Belgium, Spain, Germany and the UK without a solvency weight. There are small positions in some green bonds issued by banks and corporates for diversification.

Triodos Bank transforms client funds entrusted to lending purposes that have a positive impact on society. Triodos Bank wants to meet the obligations to all clients at all time without incurring additional costs and/or resulting in reputational issues. Triodos Bank therefore has a low risk appetite for liquidity risk with limits regarding the size and quality of the liquidity buffer accordingly. Triodos Bank ensures availability of a sufficient liquidity buffer of high credit quality and a stable funding base.

The total amount of funds entrusted is EUR 11,747 million of which 79% are deposits insured by the Deposit Guarantee Scheme.

In 2020 Triodos Bank increased its collateral position at DNB to the participate in the Targeted Long-Term Refinancing Operation of the Euro system. This collateral is mainly provided by the retained RMBS Sinopel and mobilized credit claims. The impact of potential collateral requirements from payment system purposes decreased significantly at Triodos Bank in 2020 due to the cancelation of some payment activities that required a high amount of collateral (collection of pension premiums). Other collateral needs mainly stem from market value changes in Interest Rate Swap positions (to manage the interest rate risks) and in FX forwards (because of hedging the currency risk of the UK subsidiary equity participation of Triodos Bank).

The liquidity risk appetite as determined by the Executive Board (EB) and Enterprise Risk Committee (ERC) is reviewed and approved by the Supervisory Board. With this governance structure in place, the risk appetite regarding liquidity is well anchored within the senior management team of the bank. The adequate organisational structure with three lines of defence ensures that a clear division of tasks, power and responsibility is in place together with an independent control, compliance, audit and risk management function.

The liquidity contingency plan has been tested and reviewed thoroughly to achieve a solid crisis management structure in case a liquidity crisis at Triodos Bank emerges.

A limit structure is in place to manage the inherent funding mismatch other than in exceptional circumstances. Triodos Bank follows the BSBC/EBA principles considering its sustainable profile, the very strong relationship with its customers, the granularity of the Funds Entrusted and its conservative and robust liquidity management framework that is integrated in the business processes.

Triodos Bank has a large, good quality liquidity buffer resulting in high Liquidity Coverage Ratios and Net Stable Funding Ratios. In all liquidity stress test scenarios Triodos Bank has sufficient liquidity to survive the total stress period.

The remaining low interest rate climate influences liquidity risk management at Triodos Bank. Triodos Bank needs to manage its liquidity buffer at an ever-increasing cost-of-carry. The trade-off between having sufficient liquidity versus the relative high costs of holding that liquidity is becoming more important.

Liquidity risk management organisation

The daily liquidity management is currently executed at banking entity level as it is the business strategy of Triodos Bank to have this process close to the end-customer to provide detailed cash forecasts. On aggregated level, Group Treasury monitors the liquidity buffer versus the internal limits daily.

Reporting and measurement systems.

Triodos Bank monitors and reports its liquidity position at different levels and frequencies. Firstly, the total liquidity position is monitored by Group Treasury and the individual banking entities on a daily basis. Secondly, the detailed liquidity position, both in total and at banking entity level, is reported to the Chief Financial Officer and Chief Risk Officer on a weekly basis. Finally, every month the liquidity ratios are reported to the Asset and Liability Committee. The main liquidity ratios are part of the quarterly ERM report.

Liquidity risk management policy

The liquidity buffer is the source of funds in case of liquidity needs. The Cash and Liquidity Management Policy describes the requirements related to the liquidity placements, investments and investment portfolio, whereas the goal is to optimize the trade off between risk and return in a manner consistent with the mission and vision of Triodos Bank.

The Liquidity Risk Management Policy describes the actions to manage the liquidity position of Triodos Bank.

The Internal Liquidity Adequacy Assessment Process (ILAAP) assesses Triodos Bank’s liquidity adequacy and liquidity management during normal business activities and in times of stress. This process is performed at least once a year and the results are submitted to the Dutch Central Bank as part of the Supervisory Review and Evaluation Process (SREP). The ILAAP Report is an internal document. The goal of this report is to properly evaluate the liquidity and funding risks and Triodos Bank’s corresponding liquidity levels and the quality of the liquidity management.

Contingency funding plans

The Liquidity Contingency Plan and the Recovery Plan describe the main items that should be considered in managing the liquidity risk position of Triodos Bank in a ‘stressed situation’. This includes liquidity stress indicators and trigger levels for management actions.

To increase the possibilities of recovery in periods of liquidity stress, Triodos Bank executed a retained securitisation transaction of Dutch mortgage loans (Sinopel 2019) and mobilized credit claims (loans to regional government entities) to the Euro system as collateral to be able to participate in the monetary (liquidity providing) operations.

Stress testing

The management of the liquidity position under ‘normal’ conditions is described in the Liquidity Risk Management Policy. Triodos Bank manages the liquidity position to withstand a liquidity crisis without damaging the on-going viability of its business. The potential but unlikely event of an upcoming liquidity crisis requires a set of early warning indicators and triggers, a set of potential early warning and recovery measures, and a dedicated organisation including a communication strategy to handle such a crisis. A list of potential early warning and recovery measures is included in the Recovery Plan. The other aspects mentioned are described in the Liquidity Contingency Plan.

Triodos Bank conducts liquidity stress tests on a monthly basis.

Declaration

A robust framework is in place at Triodos Bank to identify, measure and manage liquidity risk in line with BCBS/ EBA principles. An integrated overview of the group cash position and liquidity metrics is available on a daily and weekly basis.

Securitisation

In 2019, Triodos executed its first retained residential mortgage backed securitisation (RMBS) transaction called Sinopel 2019 B.V. (“Sinopel”). A securitisation is a transaction where a pool of assets is sold to a special purpose vehicle. The special purpose vehicle issues notes with different tranches to finance the purchase price of the assets. Sinopel 2019 adheres to the Simple Transparent and Standardised (STS) securitisation framework.

With Sinopel Triodos Bank structured a retained RMBS whereby Triodos is the sole buyer of the issued notes and as such has not transferred any credit risk. Through the retained RMBS, Triodos strengthens its financial resilience and gains additional access to (central bank) liquidity by pledging the notes as collateral with the Dutch Central Bank. The Sinopel RMBS is collateralised by Dutch residential mortgages loans. The structure is fully compliant with the new Simple Transparent Standardised EU regulation. For notes issued by Sinopel 2019 B.V., the following ECAIs were involved: DBRS Ratings Limited and S&P Global Ratings Europe.

As there is no risk transfer with the Sinopel transaction, the securitisation exposures (notes) are not risk-weighted separately. The securitised assets (mortgage loans) are taken into account as if they were not securitised. Triodos consolidates Sinopel in its annual accounts.

Apart from the Sinopel transaction Triodos is not active as originator, investor or sponsor of securitisation exposures. As a result, Triodos does not hold any re-securitisation positions and does not provide securitisation related services to any other Special Purpose Vehicle.

Quantitative liquidity risk disclosures

Maturity analysis for financial liabilities and financial assets

The following tables set out the earliest possible contractual maturities of Triodos Bank's financial liabilities and financial assets.

2020

Less than
1 month
1

1–3
months

3 months
–1 year

1–5 years

More than
5 years

No maturity

Total

Financial asset by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

2,955,787

-

-

-

-

-

2,955,787

Loans and advances to banks

126,615

8,948

15,000

-

-

-

150,563

Loans and advances to customers

132,435

615,256

832,317

3,202,127

4,374,575

-

9,156,710

Debt securities at amortised cost

9,015

36,149

206,436

857,992

207,709

-

1,317,301

Investment securities

-

-

-

-

-

31,214

31,214

Non-trading derivatives

-

-

877

894

24

-

1,795

Other assets 2

26,310

12,258

3,840

2,113

19,376

211,130

275,027

 

 

 

 

 

 

 

 

Total assets

3,250,162

672,611

1,058,470

4,063,126

4,601,684

242,344

13,888,397

 

 

 

 

 

 

 

 

Financial liability by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banks

87

-

753,067

13,378

48,608

-

815,140

Deposits from customers

10,735,658

494,777

278,034

204,101

34,637

-

11,747,207

Non-trading derivatives

476

714

4,912

869

3,481

-

10,452

Debt issued and other borrowed funds

-

-

9

-

6,359

-

6,368

Other liabilities 3

61,842

4,034

11,775

12,002

9,936

1,429

101,018

 

 

 

 

 

 

 

 

Total liabilities

10,798,063

499,525

1,047,797

230,350

103,021

1,429

12,680,185

 

 

 

 

 

 

 

 

Contingent liabilities

3,336

794

4,834

22,957

41,183

-

73,104

Irrevocable facilities

94,364

53,844

208,909

1,111,268

467,948

-

1,936,333

 

 

 

 

 

 

 

 

Total off balance sheet liabilities

97,700

54,638

213,743

1,134,225

509,131

-

2,009,437

1 Includes assets and liabilities on demand.
2 Includes intangible assets, property and equipment, investment property, right-of-use assets, deferred tax assets, other assets and non-current assets held for sale as presented in the consolidated balance sheet.
3 Includes lease liabilities, deferred tax liabilities, current tax liability and other liabilities as presented in the consolidated balance sheet.

2019

Less than
1 month
1

1–3
months

3 months
–1 year

1–5 years

More than
5 years

No maturity

Total

Financial asset by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

2,269,983

-

-

-

-

-

2,269,983

Loans and advances to banks

205,078

7,513

15,000

-

-

-

227,591

Loans and advances to customers

218,894

470,833

554,765

2,311,366

4,653,156

-

8,209,014

Debt securities at amortised cost

20,312

15,051

162,407

663,024

173,497

-

1,034,291

Investment securities

-

-

-

-

-

24,299

24,299

Non-trading derivatives

552

-

5,035

2,227

908

-

8,722

Other assets 2

50,249

508

18,925

19,408

13,269

205,329

307,688

 

 

 

 

 

 

 

 

Total assets

2,765,068

493,905

756,132

2,996,025

4,840,830

229,628

12,081,588

 

 

 

 

 

 

 

 

Financial liability by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banks

697

1,425

5,267

27,484

35,847

-

70,720

Deposits from customers

9,356,771

730,225

306,174

265,725

34,804

-

10,693,699

Non-trading derivatives

578

-

7,429

4,629

2,427

-

15,063

Other liabilities 3

39,455

8,518

24,493

12,637

14,558

1,518

101,179

 

 

 

 

 

 

 

 

Total liabilities

9,397,501

740,168

343,363

310,475

87,636

1,518

10,880,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

2,468

882

1,071

61,413

41,661

-

107,495

Irrevocable facilities

68,713

68,414

138,097

617,951

509,275

-

1,402,450

 

 

 

 

 

 

 

 

Total off balance sheet liabilities

71,181

69,296

139,168

679,364

550,936

-

1,509,945

1 Includes assets and liabilities on demand.
2 Includes intangible assets, property and equipment, investment property, right-of-use assets, deferred tax assets, other assets and non-current assets held for sale as presented in the consolidated balance sheet.
3 Includes lease liabilities, deferred tax liabilities, current tax liability and other liabilities as presented in the consolidated balance sheet.

The amounts in the table above have been compiled as follows:

Type of financial instrument

Basis on which amounts are compiled

Non-derivative financial liabilities and financial assets

Undiscounted cash flows, which include estimated interest payments.

Contingent and irrevocable facilities

Contractual maturity date of the off balance facility. Contingent facilities relate to credit and non-credit substitute guarantees. Credit substitute guarantees are guarantees to customers for loans provided to these customers by other banks. Non-credit substitute guarantees are guarantees to customers for all other obligations of these customers to third parties. Many of these quarantees are expected to expire without being drawn on and therefore do not necessarily represent future cash outflows. Irrevocable facilities mainly constitute accepted loans not yet paid out. Many of these facilities are for a fixed duration and bear interest at a floating rate.

Derivative financial liabilities and financial assets held for risk management purposes

Contractual undiscounted cash flows. The amounts shown are the gross nominal inflows and outflows for derivatives that have simultaneous gross settlement (e.g. forward exchange contracts and currency swaps) and the net amounts for derivatives that are net settled.

Triodos Bank’s expected cash flows on some financial assets and financial liabilities can vary significantly from the contractual cash flows. The principal differences are as follows:

  • demand deposits from customers are expected to remain stable or increase;

  • unrecognised loan commitments are not all expected to be drawn down immediately; and

  • retail mortgage loans have an original contractual maturity of up to 35 years, end of 2019 this resulted in an average contractual maturity of 15.5 years and an average expected maturity of 10.1 years because customers take advantage of early repayment options.

Liquidity reserves

 

2020

2019

 

Carrying amount

Carrying amount

Balances with central banks

2,955,787

2,269,983

Cash and balances with other banks

150,563

227,591

Unencumbered debt securities issued by sovereigns

877,246

613,518

Undrawn credit lines granted by central banks*

139,143

787,627

Other assets eligible for use as collateral with central banks

245,977

313,773

 

 

 

Total liquidity reserves

4,368,716

4,212,492

* The amount is the actual credit line available.

Financial assets available to support future funding

 

Pledged as collateral

 

 

2020

Encumbered

Unencumbered

Total

 

 

 

 

Cash and cash equivalents

-

2,955,787

2,955,787

Loans and advances to banks

22,110

128,453

150,563

Debt securities at amortised cost

178,526

1,138,775

1,317,301

Loans and advances to customers

793,749

8,362,961

9,156,710

Investment securities

-

31,214

31,214

Non-financial assets

-

276,822

276,822

 

 

 

 

Total assets

994,385

12,894,012

13,888,397

 

 

 

 

 

Pledged as collateral

 

 

2019

Encumbered

Unencumbered

Total

 

 

 

 

Cash and cash equivalents

-

2,269,983

2,269,983

Loans and advances to banks

21,706

205,885

227,591

Debt securities at amortised cost

92,826

941,465

1,034,291

Loans and advances to customers

889,580

7,319,434

8,209,014

Investment securities

-

24,299

24,299

Non-financial assets

-

316,410

316,410

 

 

 

 

Total assets

1,004,112

11,077,476

12,081,588

In addition, in some Triodos Bank N.V. has an obligation to maintain a reserve with central banks. As at 31 December 2020, the minimum mandatory reserve deposits with various central banks amount to EUR 102,245 (2019: EUR 91,752).

Market risk

Market risk management

Market risk is the risk of losses in on and off-balance positions arising from movements in market prices. For Triodos Bank this means changes in interest rates and foreign exchange rates in particular. Triodos Bank doesn’t have a trading book, but interest rate risk is present in the banking book.

Foreign exchange risk is the current or prospective risk to earnings and capital that arises from adverse movements in foreign exchange rates. Triodos Bank’s base currency is the euro. The base currency of the UK subsidiary of Triodos Bank is GBP.

Triodos Bank aims to avoid net currency positions with the exception of those arising from strategic investments. The forward positions in foreign currencies are used for hedging the currency risk of the UK subsidiary equity participation. The position also contains the currency derivatives of Triodos Investment Funds which are nearly fully hedged.

The foreign exchange position is monitored daily and discussed in the Asset and Liability Committee on a monthly basis. Limits are agreed by the ALCo.

Market risk structure and organisation

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.

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

Market risk measurement systems

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.

Triodos Bank entered into FX deals with Triodos Investment Funds and these deals are hedged by deals with a few banks. Wrong-way risk is the risk that the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. 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. At the end of 2017 Triodos Bank stopped entering into new FX deals with Triodos Investment Funds because of new regulation. 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.

Interest rate risk in the Banking Book

Interest rate risk is generated by normal customer related banking activities. Triodos Bank uses retail funding to finance clients and projects which aim to improve society and the environment. In addition, the bank maintains solid capital and liquidity buffers to support its resilience.

The level of interest rate risk is managed in a four-stage risk control cycle. In this cycle, first the relevant definitions, indicators, measurement methods, and analysis for IRRBB are set. Next, the limits for the main IRRBB indicators are specified in the risk appetite statement. The third stage defines the roles and responsibilities for IRRBB management, model governance, and escalation procedures and exceptions. Lastly, the risks are monitored, reported and mitigated if necessary.

The development at the individual banking entities determines an important part of the risk development. Each banking entity sets up a budget for the next three years and updates it quarterly with a forecast. The budgets are consolidated and compliance with the risk appetite is checked. Adherence to the budget means that asset and liability management is predictable and therefore the fulfilment of the budget is closely monitored.

Triodos Banks manages its interest rate risk position in three ways. - Firstly, Triodos Bank is to a limited extent able to steer the volume and interest rate terms of new assets and the interest rate of its liabilities in order to maintain the interest rate risk exposure within limits. However, changes in client rates and terms will not be made to the extent that they would materially impair Triodos Bank’s customer service, market position, profitability, capital adequacy and reasonable customer expectations. - Secondly, the amount and duration of the marketable investments in the liquidity buffer can be adjusted. - Finally, Triodos Bank uses Interest Rate Swap (IRS) contracts to maintain the bank’s IRRBB exposure within the limits, if the first two methods are not effective enough. The consequent positions are taken into account in all the IRRBB calculations and subject to hedge accounting to avoid volatility in the P&L.

The ALCo is delegated by the Executive Board to monitor and take decisions related to the management of the IRRBB. Additionally, the ALCo approves material changes to IRRBB models and changes to important model assumptions. Finally, the ALCo decides on approval of and monitors adherence to the group-wide pricing framework for retail and business banking products.

One of our main strategic risks is the low interest rate environment. With the economy hit hard by the global pandemic and a long recovery ahead of us, low interest rates are likely to continue for some time, with a negative impact on Triodos Bank’s return. As rates on the assets are decreasing, and the rates on the liabilities have hit the psychological floor of zero percent, the margin is being compressed. Negative rates on savings and current accounts of clients with a balance over EUR 100.000, as well as fees on savings accounts were introduced to be able to deal with the margin compression.

Interest Rate Risk management and mitigation strategies

Triodos Bank defines interest rate risk in the banking book (IRRBB) as the risk that changes in prevailing interest rates will adversely affect the market value of assets versus that of liabilities and/or income versus expenses. Triodos Bank identifies the following three main sources of IRRBB:

  • Gap risk, the risk of adverse consequences due to differences in timing of the impact of interest rate changes on the value and interest of assets and liabilities, covering changes to the term structure of interest rates occurring consistently across the yield curve (parallel risk) or differentially by tenor (non-parallel risk).

  • Basis risk, the risk of adverse consequences which result from changes in the difference between two or more rates for different instruments with the same interest maturity but different benchmark rates on which the pricing is based.

  • Option risk, the risk that changes in market interest rates prompt changes in the value or maturity of instruments, due to explicit or implicit optionality embedded in the bank’s products.

Main measures

Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the ALCo monthly and reported quarterly to the Executive Board. The main IRRBB indicators used are Earnings at Risk, Economic Value of Equity at Risk, Modified Duration of Equity, and Gap analysis. Below follows a brief description:

  • Earnings at Risk: a short-term indicator which shows the effect of an interest rate shock on Triodos Bank’s net interest income over a one year and two-year horizon.

  • Economic Value of Equity at Risk: a long-term indicator which represents the change of the Economic Value of Equity (which is the net present value of the future cash flows of all assets netted with the net present value of the future cash flows of the liabilities) in the event of an interest rate shock.

  • Modified Duration of Equity: an indicator that expresses the sensitivity of the Economic Value of Equity in the event of parallel interest rate changes.

  • Gap analysis: allows to get a quick and intuitive sense of how Triodos is positioned by comparing the values of the assets and liabilities that roll over – or reprice – at various time periods in the future. While a Gap analysis is a good measure of repricing risk, it is not able to measure interest rate risk stemming from option risk and basis risk. Therefore, Triodos Bank monitors the sensitivity of economic value of the banking book items to interest rate changes for different parts of the yield curve, by calculation of key rate durations.

Option risk is typically present in the form of caps and/or floors on floating interest rates and as a result of client and bank behaviour, i.e. due to prepayments on loans and mortgages, withdrawal of funds entrusted, and the discretion to change the interest rate on savings and current accounts. Both embedded options and behavioural characteristics are considered in the IRRBB measures.

Due to the growth of the mortgage portfolio, Triodos has also worked (and continues working) on improving the data on off-balance commitments. Especially fixed rate commitments (which are often present in new mortgages to be paid out) add to the interest rate position of the Bank.

Triodos Bank runs a variety of interest rate scenarios to assess its level of interest rate risk. The scenarios are expressed as shocks to the market rate. These shocks can vary from parallel shocks to non-parallel shocks, downward to upward shocks, and instant to gradual shocks. Part of the shocks are prescribed by regulatory guidelines whereas other shocks are developed internally. The interest rate scenarios are regularly reviewed and approved in the ALCo.

Modelling and parametric assumptions

The model used for calculating IRRBB meaasures complies with the EBA guidelines. The balance sheet develops according to the budget/forecasts for earings calculations and uses run off profile for the EVE calculations. In modelling of IRRBB, client behaviour is complex as it depends on many factors and, as a result, IRRBB models in general build on many assumptions. A brief description of relevant assumptions used in Triodos Bank’s IRRBB modelling follows below.

First of all, behavioural models are used to assess the interest rate risk in savings and current accounts. The interest rate risk stemming from these products is difficult to quantify since these accounts typically have variable interest rates and no fixed maturity. The objective of the models used is to forecast the future outflow of the non-maturing deposits and their sensitivities to market conditions based on historical data, taking into consideration the statistical significance of that data. The model combines the relationship between client interest rates and market interest rates and outflow predictions.

Secondly, prepayments on loans and mortgages affect interest rate risk on the asset side of the balance sheet and depend on customer behaviour as well. Due to the low interest rate environment and the maturity of the portfolio, prepayments increased during the last years. Therefore, behavioural assumptions are present in the risk model and the level of prepayments is included in the measurement of IRRBB. Currently, a constant prepayment rate is used, consistent with the forecast made by the banking entities. Triodos Bank takes into account the correlation between interest rate levels and prepayment behaviour by using sensitivity analyses.

Thirdly, some of Triodos Bank’s loans and mortgages contain caps and floors to prevent interest rates increasing or decreasing below a certain level. This affects the level of IRRBB in these products and both are taken into account in the economic value and earnings analysis. The economic value of the pipeline, which contains loans with a set interest rate which are committed but not yet remitted, is considered as well.

The EVE measures, Duration of Equity and Outlier Criterion measures are determined using risk free discounting and commercial margin and other spread components are excluded from the cash flow calculations.

Explanation of the risk measures significant variations of those risk measures

The one-year Net Interest Income at Risk increased from 2.5% at the end of 2019 to 2.8% at the end of 2020. This is the impact of a ramped parallel 2% downward scenario, a floor based on expert judgement is applied to the market rates.

Duration of equity increased from 0.3 years to 3.3 years in 2020. This increase was mainly caused by the growing mortgage portfolio and the inclusion of interest rate sensitivity of embedded options in the duration of equity measure. These two effects were partly offset with a higher savings duration caused by the continuing low interest rate environment.

The Economic Value of Equity (EVE) at Risk increased from 4.1% at the end of 2019 to 15.0% at the end of 2020. The sharp increase is partly due to the introduction of risk-free discounting, and partly due to the growing mortgage portfolio. When using the same methodology as last year, the current value would be 9.4%. The worst-case scenario from the perspective of EVE at Risk occurs under a parallel upward shock of the yield curve. The supervisory outlier test (SOT) increased from 12.9% at the end of 2019 to 17.2% at the end of 2020. All EVE measures including the SOT are now calculated using risk-free discounting, only the duration of equity is still calculated using product specific spread components. The new methodologies impact the numbers significantly, together with the introduction of the new methodologies the process was started to gradually reduce the interest rate risk, this process will be finalized in the first quarter of 2021.

Regarding the EUR portfolio, the duration of equity increased from 0.4 years at the end of 2019 to 2.81 years at the end of 2020. The one-year Euro Net interest Income at Risk, at 2020 year-end, increased slighlty from 2.6% to 3.1%, compared to the end of 2019. The EUR EVE at Risk increased from 4.7% at the end of 2019 to 16.3% at the end of 2020.

Duration of equity of the Pound Sterling (GBP) portfolio increased from 0.4 years at the end of 2019 to 5.2 years at the end of 2020. The one-year GBP Net Interest Income at Risk decreased from 3.2% at the end of 2019 to 0.9% at the end of 2020. The GBP EVE at Risk increased from 5.5% at the end of 2019 to 9.7% at the end of 2019.

Quantitative market risk disclosures

Interest Rate Risk in the Banking Book

The following table shows the interest rate risk within Triodos Bank:

2020

Floating-
rate

<= 3
months

<=
1 year

<=
5 years

>
5 years

Total

Interest-bearing assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

2,956,179

-

-

-

-

2,956,179

Banks

134,112

1,453

-

14,000

1,000

150,565

Loans

1,174,082

998,082

1,510,417

2,759,799

2,757,857

9,200,237

Hedged loans

12,500

159,000

165,900

-195,500

-141,900

-

Interest-bearing securities

-

53,923

214,299

840,055

199,652

1,307,929

 

 

 

 

 

 

 

Total

4,276,873

1,212,458

1,890,616

3,418,354

2,816,609

13,614,910

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Banks

750,220

1,312

9,264

24,258

31,910

816,964

Subordinated loan

-

-

-

-

6,369

6,369

Funds entrusted

12,472

1,385,853

1,943,651

5,877,833

2,521,691

11,741,500

 

 

 

 

 

 

 

Total

762,692

1,387,165

1,952,915

5,902,091

2,559,970

12,564,833

2019

Floating-
rate

<= 3
months

<=
1 year

<=
5 years

>
5 years

Total

Interest-bearing assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

2,270,224

-

-

-

-

2,270,224

Banks

212,087

474

15,000

-

-

227,561

Loans

1,106,829

887,460

1,451,037

2,469,173

2,326,996

8,241,495

Hedged loans

-

82,800

67,400

-114,700

-35,500

-

Interest-bearing securities

-

55,226

161,072

640,717

166,407

1,023,422

Hedged interest-bearing securities

-

89,500

55,475

-104,975

-40,000

-

 

 

 

 

 

 

 

Total

3,589,140

1,115,460

1,749,984

2,890,215

2,417,903

11,762,702

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Banks

212

1,359

5,819

28,634

33,999

70,023

Funds entrusted

26,333

1,217,498

1,776,985

5,329,176

2,333,269

10,683,261

 

 

 

 

 

 

 

Total

26,545

1,218,857

1,782,804

5,357,810

2,367,268

10,753,284

Only interest-bearing assets and liabilities are reported in this table, which results in differences with the balance sheet figures. No allowance for expected credit losses, net modification of amortised cost or interest amounts are showed in this table above. Interest bearing securities are valued at redemption value including bond premium and after deduction of discounts. For funds entrusted without a fixed interest rate term, the outcome of the quantitative savings and current account model, as mentioned before, is used. All other interest-bearing assets and liabilities are reported as floating rates or are broken down in the maturity calendar by their remaining contractual interest rate term.

Foreign exchange risk

Foreign exchange risk is the current or prospective risk to earnings and capital that arises from adverse movements in foreign exchange rates. Triodos Bank’s base currency is the euro. The base currency of the UK subsidiary of Triodos is GBP.

The following table shows Triodos Bank's foreign currency position in thousands of EUR as at 31 December.

2020

Cash position
Debit

Cash position
Credit

Term position
Debit

Term position
Credit

Net position
Debit

Net position
Credit

 

 

 

 

 

 

 

GBP

1,792,659

1,585,255

-

192,519

14,885

-

USD

13,995

434

4,908

4,908

13,561

-

NOK

95

-

-

-

95

-

AUD

1

-

-

-

1

-

SEK

51

-

-

-

51

-

INR

-

-

9,191

9,191

-

-

IDR

-

-

-

-

-

-

CNY

-

-

-

-

-

-

 

 

 

 

 

 

 

Total

1,806,801

1,585,689

14,099

206,618

28,593

-

Net open foreign currency position (total of net positions debit and credit): 28,593

2019

Cash position
Debit

Cash position
Credit

Term position
Debit

Term position
Credit

Net position
Debit

Net position
Credit

 

 

 

 

 

 

 

GBP

1,577,785

1,372,842

-

192,519

12,424

-

USD

20,083

1,676

9,708

9,708

18,407

-

NOK

101

-

-

-

101

-

AUD

1

-

-

-

1

-

SEK

49

-

-

-

49

-

INR

-

-

38,786

38,786

-

-

IDR

-

-

6,172

6,172

-

-

CNY

-

-

3,309

3,309

-

-

 

 

 

 

 

 

 

Total

1,598,019

1,374,518

57,975

250,494

30,982

-

Net open foreign currency position (total of net positions debit and credit): 30,982

Capital management

Triodos Bank wants to be strongly capitalised to support our growth strategy and to be a strong counterparty for our clients. Therefore, we maintain a relatively high equity base, which as a consequence puts downward pressure on the Return on Equity.

The objective of Triodos Bank’s capital strategy is to ensure its viability by:

  • Maintaining sufficient capital to absorb current and future business losses, also in extreme situations (‘stress’);

  • Adequately allocate capital to its business units; and

  • Ensuring compliance to all applicable capital legislation and regulation at all times.

All of Triodos Bank’s solvency comes from common equity.

Regulation

Banking industry is highly regulated. Regulations play an important role in society to ensure banks operate safely. Triodos Bank pays constant attention to comply with all regulation.

Basel III is a worldwide standard for regulation, supervision and risk management of the banking sector, developed by the Basel Committee on Banking Supervision. Basel III has been transposed by the European Union into the Capital Requirements Regulation and the Capital Requirements Directive IV. The Capital Requirements Regulation is directly applicable and the Capital Requirements Directive IV was transposed into local law by each of the members of the European Union so is the Dutch implementation of the Capital Requirements Directive IV as Triodos Bank is formally domiciled in The Netherlands.

There is no difference in the scope of consolidation for accounting and for prudential reporting purposes. Except for transfer of own funds of Triodos Bank UK Ltd, there is not any current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities among Triodos Bank and its consolidated companies.

Internal capital

The capital strategy of Triodos Bank is captured in its Internal Capital Adequacy Assessment Process (‘ICAAP’). The ICAAP covers, for example, the measurement of risks requiring an adequate capital buffer, stress testing, capital contingency and the allocation of available capital to the different Triodos Bank banking entities and business units. The ICAAP is subjected to the Supervisory Review and Evaluation Process (SREP) of the Dutch Central Bank on a yearly basis.

The actual capital position is stressed regularly based on a number of stress scenarios. A capital contingency process is set up for Triodos Bank in case of a (potential) shortfall in available capital, which can be a threat to its solvency. For this purpose, the Recovery Plan contains measures for restoring its solvency by reducing risks and/or increasing capital and provides a specific governance structure for these stressed conditions.

Capital allocation and monitoring

Equity is allocated to banking entities, in proportion to the outcome of the internal capital calculation. Triodos Bank works with a rolling three-year capital forecast. The Asset and Liability Committee monitors Triodos Bank’s capital position and advises the Executive Board on the capital adequacy. The Asset and Liability Committee also assesses whether available capital is sufficient to support current and future activities on a monthly basis. During 2020 available capital has been at sufficient levels at all times in line withexternal regulatory minimum requirements. A retained portion of the 2020 profit will be added to its reserves.

Capital requirements

Triodos Bank calculates its internal capital adequacy requirements based on minimum requirements (‘pillar I’) and supplemented with additional capital charges (‘pillar II’), as described in the Capital Requirement Regulation.

The total capital ratio increased by 0.9% from 17.9% at the year end 2019 to 18.8% at the year end 2020. This ratio is still well above the regulatory requirement. In December 2020 Triodos Bank issued Tier 2 capital in the amount of EUR 6.4 million. Further quantative information is disclosed in the Pillar 3 report which can be found on the website of Triodos Bank.

Minimum capital requirements (pillar I)

The total minimum regulatory requirement consists of capital charges for credit risk, operational risk and market risk:

  • Credit risk – Triodos Bank applies the standardised approach (SA) for calculating its minimum capital requirements for credit risk and the simple approach for credit risk mitigation. The risk weighted asset calculations are done for all on-balance sheet exposures (including the loan book and the investment book), and off-balance sheet items (such as loan offers, not yet accepted) and derivatives exposures;

  • Operational risk – Based on the size and limited complexity of the Triodos Bank organisation, the basic indicator approach (BIA) is used for calculating the capital requirement for operational risk, which equals 15% of the average over three years of Triodos Bank’s gross income;

  • Market risk – The capital charge for Triodos Bank’s market risk is related to its exposure to foreign exchange risk. The requirement is calculated as the sum of the bank’s overall net foreign exchange position, multiplied by 8%. Triodos Bank only accepts limited net foreign exchange positions in strategic investments and in its UK activities in GBP. However, when the regulatory threshold of 2% of the actual own funds is not exceeded, the capital charge for market risk is zero;

  • Credit valuation adjustment risk – The capital charge for the counterparty risk of derivative transactions that are not cleared through a qualified central counterparty.

Additional capital requirements

In order to determine its economic capital, Triodos Bank also calculates additional capital requirements. These consist of charges for risks or parts of risks that are not covered by Pillar 1. This consists of items in the areas of credit risk, strategic risk, interest rate risk in the banking book, model risk and operational risk. The total capital requiment consists, next to the pillar I and II requirements, also of the combined buffer requirements.

Management of excessive leverage

The risk of excessive leverage is managed inclusively in our capital management policy and procedures. We aim for a strong capital base, avoiding high leverage risks. Triodos’ risk appetite level related to the leverage ratio is set at 7%, which is significantly above all regulatory requirements.

At year end the relevant capital used to calculate the leverage ratio consists only of CET1 capital. Our capital base is therefore not subject to refinancing risks. The leverage ratio is part of our three-year budget. Compliance with our risk appetite level is part of the budget requirements.

Triodos has participated in the TLTRO III.5 which usually decreases the leverage ratio. However, in 2020 the ECB formulated new regulation so that amounts placed with central banks can be left out of the leverage ratio calculation.

Fair value of financial instruments

Valuation models

Triodos Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

  • Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments.

  • Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

  • Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Triodos bank determines the fair value of its financial instruments using the following bases. The fair value of listed debt securities at amortised cost is the market value. The fair value of unlisted debt securities at amortised cost is public quoted information if available or nominal value. The fair value of loans and advances to banks, lease liabilities, deposits from banks, deposits from customers and debt issued and other borrowed funds has been determined by calculating the net present value of expected interest and redemption cashflows, taken into account market interest rates as at the end of the year. The fair value of loans and advances to customers (including mortgages) has been determined by calculating the net present value of the interest and redemption cashflows, taken into account expected prepayment behavior. The net present value is calculated by using market data, i.e. zero coupon rates, as at the end of the year, which are adjusted with a Triodos Bank-specific spread. The spread is based on the expected margin the business units expect to make over the market base rates in the coming years on their production of business loans and mortgages. Part of the corporate loans and mortgages include caps and/or floors on the interest rates. The fair value of the other asset and liabilities are assumed to be equal to the balance sheet value.

Investments securities comprise participating interests and debt where no significant influence can be exercised and are carried at fair value through either comprehensive income or profit and loss. In the case of an investment security that is listed on an active stock exchange, the fair value will be deemed to be equal to the most recently published stock exchange price. In the case of an investment security not listed on an active stock exchange or where there is no regular price quotation, the fair value will be determined to the best of one’s ability using all available data, including an annual report audited by an external independent auditor, interim financial information from the institution and any other relevant data provided to Triodos Bank.

Derivatives held for risk management are carried at fair value through profit and loss. These instruments are split between interest rate swaps and foreign exchange rate forward contracts. The interest rate swaps are valued using the appropriate discount curve to calculate the net present value of expected cashflows under the contracts. This curve is openly observable from market data. See Financial instruments for further information on the valuation. The foreign exchange rate forward contracts are valued using the forward exchange rate for the corresponding currency, as observable from market data.

Financial instruments measured at fair value – Fair value hierarchy

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised.

2020

Level 1

Level 2

Level 3

Total

Derivative assets held for risk management

 

 

 

 

Interest rate

-

24

-

24

Foreign exchange

-

1,771

-

1,771

 

 

 

 

 

Total

-

1,795

-

1,795

 

 

 

 

 

Investment securities

 

 

 

 

Equities

8,601

13,694

4,458

26,753

Debt

-

4,461

-

4,461

 

 

 

 

 

Total

8,601

18,155

4,458

31,214

 

 

 

 

 

Derivative liabilities held for risk management

 

 

 

 

Interest rate

-

6,344

-

6,344

Foreign exchange

-

4,108

-

4,108

 

 

 

 

 

Total

-

10,452

-

10,452

2019

Level 1

Level 2

Level 3

Total

Derivative assets held for risk management

 

 

 

 

Interest rate

-

908

-

908

Foreign exchange

-

7,814

-

7,814

 

 

 

 

 

Total

-

8,722

-

8,722

 

 

 

 

 

Investment securities

 

 

 

 

Equities

13,160

1,442

4,960

19,562

Debt

-

4,737

-

4,737

 

 

 

 

 

Total

13,160

6,179

4,960

24,299

 

 

 

 

 

Derivative liabilities held for risk management

 

 

 

Interest rate

-

5,012

-

5,012

Foreign exchange

-

10,051

-

10,051

 

 

 

 

 

Total

-

15,063

-

15,063

Level 3 valuations relate to participating interest which are valued at fair value through other comprehensive income. Total fair value changes amount to EUR -420 (2019: EUR -272).

Financial instruments not measured at fair value

The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.

2020

Level 1

Level 2

Level 3

Total Fair Values

Total Carrying

Assets

 

 

 

 

 

Debt securities at amortised cost

1,221,053

119,160

-

1,340,213

1,317,301

Loans and advances to banks

-

-

150,601

150,601

150,563

Loans and advances to customers

-

-

9,395,422

9,395,422

9,156,710

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits from banks

-

-

813,457

813,457

815,140

Deposits from customers

-

-

11,935,701

11,935,701

11,747,207

Debt issued and other borrowed funds

-

-

7,194

7,194

6,368

Lease liabilities

-

-

24,182

24,182

19,963

 

 

 

 

 

 

2019

Level 1

Level 2

Level 3

Total Fair Values

Total Carrying

Assets

 

 

 

 

 

Debt securities at amortised cost

948,403

109,798

-

1,058,201

1,034,291

Loans and advances to banks

-

-

227,611

227,611

227,591

Loans and advances to customers

-

-

8,315,161

8,315,161

8,209,014

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits from banks

-

-

68,714

68,714

70,720

Deposits from customers

-

-

10,695,702

10,695,702

10,693,699

Debt issued and other borrowed funds

-

-

-

-

-

Lease liabilities

-

-

23,822

23,822

22,078

Fair value of the cash and cash equivalents approximates the total carrying amount as these are on demand balances and therefore not included in the above table.

Classification of financial assets and financial liabilities

The following table provides a reconciliation between line items in the statement of financial position and categories of financial instruments.

2020

Mandatorily at FVTPL

Designated as at FVTPL

FVOCI – equity instruments

Amortised cost

Total carrying amount

 

 

 

 

 

 

Cash and cash equivalents

-

-

-

2,955,787

2,955,787

Debt securities at amortised cost

-

-

-

1,317,301

1,317,301

Loans and advances to customers

-

-

-

9,156,710

9,156,710

Loans and advances to banks

-

-

-

150,563

150,563

Investment securities

4,461

-

26,753

-

31,214

Other assets

-

-

-

275,027

275,027

Derivative assets held for risk management

1,795

-

-

-

1,795

 

 

 

 

 

 

Total financial assets

6,256

-

26,753

13,855,388

13,888,397

 

 

 

 

 

 

Derivative liabilities held for risk management

10,452

-

-

-

10,452

Deposits from banks

-

-

-

815,140

815,140

Deposits from customers

-

-

-

11,747,207

11,747,207

Lease Liabilities

-

-

-

19,963

19,963

Other liabilities

-

-

-

87,423

87,423

 

 

 

 

 

 

Total financial liabilities

10,452

-

-

12,669,733

12,680,185

2019

Mandatorily at FVTPL

Designated as at FVTPL

FVOCI – equity instruments

Amortised cost

Total carrying amount

 

 

 

 

 

 

Cash and cash equivalents

-

-

-

2,269,983

2,269,983

Debt securities at amortised cost

-

-

-

1,034,291

1,034,291

Loans and advances to customers

-

-

-

8,209,014

8,209,014

Loans and advances to banks

-

-

-

227,591

227,591

Investment securities

4,737

-

19,562

-

24,299

Other assets

-

-

-

307,688

307,688

Derivative assets held for risk management

8,722

-

-

-

8,722

 

 

 

 

 

 

Total financial assets

13,459

-

19,562

12,048,567

12,081,588

 

 

 

 

 

 

Derivative liabilities held for risk management

15,063

-

-

-

15,063

Deposits from banks

-

-

-

70,720

70,720

Deposits from customers

-

-

-

10,693,699

10,693,699

Lease Liabilities

-

-

-

22,078

22,078

Other liabilities

-

-

-

79,101

79,101

 

 

 

 

 

 

Total financial liabilities

15,063

-

-

10,865,598

10,880,661

Non-trading derivatives and hedge accounting

Non-trading derivatives

The following table describes the fair values of derivatives held for risk management purposes by type of instrument.

 

2020

2019

 

Assets

Liabilities

Assets

Liabilities

Instrument type

 

 

 

 

Interest rate

 

 

 

 

Designated in fair value hedges

-

6,344

908

5,012

Other derivatives

24

-

-

-

 

 

 

 

 

Foreign exchange

 

 

 

 

Designated in a net investment hedge

-

2,407

-

2,565

Other derivatives

1,771

1,701

7,814

7,486

 

 

 

 

 

Total foreign exchange

1,771

4,108

7,814

10,051

 

 

 

 

 

Total non-trading derivatives

1,795

10,452

8,722

15,063

Fair value hedges of interest rate risk

Triodos Bank uses interest rate swaps to hedge its exposure to changes in the fair values of fixed- rate euro loans and advances in respect of a benchmark interest rate (mainly Euribor). At the beginning of the year 2020 Triodos Bank made changes in its risk management strategy towards interest rate risk and has updated our hedge strategy accordingly. As of 1 January 2020 Triodos Bank applies the EU carve-out under IAS 39.

This means that Triodos Bank changed from designating individual hedged items and hedging instruments into fair value hedge relationships to portfolio designation, or, macro fair value hedge accounting. The types of hedging instruments and hedged items remain unchanged. The existing hedge relationships have been terminated and as of 2020 these have been designated in a hedge relationship on a portfolio basis.

Triodos Bank determines hedged items by identifying portfolios of homogenous loans based on their contractual interest rates, maturity and other risk characteristics. Loans within the Identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments (pay fix/receive floating rate interest rate swaps) are designated appropriately to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk, against the fair value movements of the derivatives, to ensure that they are within an 80% to 125% range.

At the time of designation of the hedge relationship for macro hedge accounting, a prospective test of the hedge relationship is performed to evidence the existence of an economic relationship. Fair value of hedged items and hedging instruments is calculated as at the designation date. In addition, the fair values are recalculated by applying at +/-50bps shift on the EURIBOR zero-curve and the OIS zero-curve. If the change in fair value of hedged item and hedging instrument is within 80-125% of each other, the hedge relationship can be expected to be highly effective.

The retrospective test is periodically performed by calculating the fair value of the hedged items and hedging instruments with the curves applicable as at that date (month end). The hedge relationship is considered to be highly effective if the delta in fair value between hedging instrument and hedged item as per designation date and as per period end date is in the 80% – 125% bandwidth, which is the so-called dollar offset method.

When the outcome of the effectiveness test is outside of the bandwidth, the hedge relationship for the tested month is discontinued. This means that the fair value changes of the hedging instruments continue to be recorded through profit and loss, but no offsetting fair value adjustment is recognised on the hedged items. At dedesignation, the fair value hedge accounting adjustments are amortised on a straight-line basis over the original hedged life. The Bank has elected to commence amortisation at the date of de-designation.

Triodos Bank discloses its risk management relates to interest rate risk in Market risk management.

Hedge relationships designated under this policy are expected to be highly effective. However, some degree of ineffectiveness is expected due to:

  • Discounting of assets with the curve of the payment frequency where the swaps are discounted using the OIS curve

  • Fair value changes in the floating leg of the swaps

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffectiveness

 

 

 

 

 

 

Interest rate swaps – portfolio hedge accounting

295,175

-

6,344

-2,216

111

 

 

 

 

 

 

 

Carrying amount

Fair value hedge adjustments

 

Hedged item

Assets

Assets

Liabilities

Change in fair value

 

 

 

 

 

 

 

Loans and advances to customers

295,975

5,286

-

2,327

 

Net investment hedge

Triodos Bank entered into GBP foreign currency forward contracts as of april 2019 hedging the currency risk of the UK subsidiary equity participation of Triodos Bank. In order to maintain an effective hedging relationship, not the full value of the UK subsidiary equity participation is hedged. Triodos Bank hedges up to a maximum of 95% of the UK subsidiary.

Triodos Bank discloses its risk management relates to foreign exchange risk in Market risk management.

Triodos Bank ensures that the foreign currency in which the hedging instrument is denominated is the same as the functional currency of the net investment. This qualitative assessment is supplemented quantitatively using the hypothetical derivative method for the purposes of assessing hedge effectiveness. Triodos Bank assesses effectiveness by comparing past changes in the fair value of the derivative with changes in the fair value of a hypothetical derivative. The hypothetical derivative is constructed to have the same critical terms as the net investment designated as the hedged item and a fair value of zero at inception. The net investment is held for a period longer than the maturity of the forward foreign exchange contracts, Triodos Bank hedges the net investment only to the extent of the nominal amount of the foreign exchange leg of the derivative.

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffectiveness

 

 

 

 

 

 

Foreign currency forward contracts (EUR:GBP)

180,100

-

2,407

-10,200

-

 

 

 

 

 

 

 

 

Carrying amount

 

 

Hedged item

Nominal amount

Assets

Liabilities

Change in fair value

Foreign currency translation reserve

 

 

 

 

 

 

GBP net investment in UK subsidiary

181,351

202,497

-

11,408

-4,440

 

 

 

 

 

 

2019

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffectiveness

 

 

 

 

 

 

Foreign currency forward contracts (EUR:GBP)

163,000

-

2,565

3,004

-

 

 

 

 

 

 

 

 

Carrying amount

 

 

Hedged item

Nominal amount

Assets

Liabilities

Change in fair value

Foreign currency translation reserve

 

 

 

 

 

 

GBP net investment in UK subsidiary

175,894

207,748

-

3,247

3,247