Financial risk is an umbrella term for a variety of risk types associated with the balance sheet and financial performance of Triodos Bank. Financial risk is subdivided into three categories: credit risk, liquidity risk and market risk.

Credit risk

Credit risk management

Credit risk is the risk that a counterparty does not 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 Bank’s lending criteria is an integral part of each credit proposal.

Triodos Bank has developed an internal rating-based economic capital model, that estimates a counterparty’s probability of default and the expected loss of a credit exposure.

Credit risk organisational structure

Each banking business unit 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 Group Head of Credit Risk at Head Office. At Group 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 also analysed at Group level. The aggregated portfolio is monitored at Group 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.

Business units need to prove, both after initial implementation and in case of changes to policies, that requirements are met in local documentation, by showing in which local documents each requirement is written down. This evidence will be stored by Group ORM. Deviations from this policy should be approved via the monthly Group Credit Committee or Non-financial Risk Committee.

Key controls related to policies are defined in our Risk Control Self Assessment (RCSA), based on the standardised process as described in the Corporate Lending Handbook. The key controls contain a risk-based subset of the requirements. The first line is responsible for enacting the key controls within its processes. Periodically, within the regular operational risk mangement cycle, key controls will be tested for their operational effectiveness by the first line. At the local level, management information dashboards are in place to monitor the risks on a continuous basis. Internal Audit performs audits on the lending activities on a regular basis.

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 focuses primarily on the quality and diversification of its loan portfolio. Triodos Bank puts extra effort into identifying loans to front-runners with a track record 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 concentration limits. The limits are based on the bank’s capital base and reflect the risk appetite.

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

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 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 business units (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. Group 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 business units in four countries (The Netherlands, Belgium, Spain and Germany), a subsidiary in the United Kingdom and additional exposures in, among others, 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 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 (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 where the 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 according to their creditworthiness and screened on their sustainability performance. Exceptions can occur, when the capacity of selected banks in a country is not considered sufficient to place Triodos Bank’s liquidities given a specific 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 business units 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 defined by the large exposures regime. Limits are further adapted according to the external rating of the counterparty. 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 serviced these funds by providing hedges for the FX risk of these funds’ investments. Triodos Bank does not enter into new FX deals with Triodos Investment Funds because of new regulation, current derivative contracts will not be renewed after maturity.

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. 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 to calculate the potential impact on Triodos Bank’s liquidity position.

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 an individual basis when appropriate.

Each business unit 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 Group Head of Credit Risk at Head Office. At Group 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 Enterprise Risk Management report.

In addition to our check on minimum standards, external credit ratings – if available – are used to determine the creditworthiness of the counterparties of our investment portfolio, including banks, and some corporates. External ratings are also used to calculate 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.

 

2021

2020

Loans and advances to banks at amortised cost

Stage 1

Stage 1

Gross amount

265,820

164,629

allowance for expected credit losses

-24

-18

Carrying amount

265,796

164,611

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 250,000 are rated. Clients with retail mortgage loans and or total business loans below EUR 250,000 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.

 

2021

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

Rating 1-9: Normal risk

5,519,854

586,885

-

6,106,739

Rating 10-13: Increased risk

24,364

135,437

-

159,801

Rating 14: Default

-

-

244,320

244,320

Not rated

3,671,195

34,723

-

3,705,918

Gross amount

9,215,413

757,045

244,320

10,216,778

allowance for expected credit losses

-8,675

-3,418

-36,887

-48,980

Carrying amount

9,206,738

753,627

207,433

10,167,798

 

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

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

 

2021

Loans and advances to customers at amortised cost

Stage 1

Stage 2

Stage 3

Total

Current

9,215,413

751,907

-

9,967,320

Overdue < 90 days

-

5,138

-

5,138

Overdue > 90 days

-

-

244,320

244,320

Total

9,215,413

757,045

244,320

10,216,778

 

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

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

 

2021

2020

Debt securities at amortised cost

Stage 1

Stage 1

AAA

34,263

67,941

AA

509,173

390,372

A

539,528

428,501

BBB

400,424

430,550

allowance for expected credit losses

-10

-63

Carrying amount

1,483,378

1,317,301

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.

 

2021

Loan commitments

Stage 1

Stage 2

Total

Gross carrying amount

1,065,319

77,377

1,142,696

allowance for expected credit losses

-1,103

-292

-1,395

Carrying amount (provision)

-1,103

-292

-1,395

 

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

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

 

2021

2020

Financial guarantee contracts

Stage 1

Stage 1

Gross carrying amount

37,712

41,009

allowance for expected credit losses

-21

-14

Carrying amount (provision)

-21

-14

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

 

2021

2020

Principal type of collateral held

Non-trading derivatives

100

100

Cash Collective

Loans and advances to customers

 

 

 

Mortgage lending

98

97

Residential Property

Business lending

63

61

Commercial Property, Other

Current accounts

-

-

None

The following table stratifies 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 according to changes in house price indices. For credit-impaired loans the value of collateral is based on the most recent appraisals.

LTV ratio

2021

2020

Less than 65%

1,669,593

1,400,205

65-75%

501,592

338,468

75-90%

609,655

458,956

More than 90%

840,288

542,301

Total residential mortgage lending

3,621,128

2,739,930

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; these 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 (ECL) for financial instruments. The ECL for stages 1 and 2 is determined by the probability of default (PD), the loss given default (LGD) and the exposure at default (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 1 includes the financial instruments that have (close to) similar credit risk since origination. For this category ECL is determined based on the PD, LGD, and EAD over the 12 months after balance sheet date.

  • Stage 2 includes the financial instruments which have had a significant increase in credit risk since origination. The ECL for stage 2 is determined based on the PD, LGD, and EAD over the entire lifetime of the financial instrument.

  • 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 over the current portfolio. 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, fewer defaults are expected. This will have a positive effect on the ECL and result in lower ECL provision for stage 1 and 2.

Newly originated financial instruments are initially included in stage 1. Changes in ratings of clients may trigger re-classification in different stages. When a rating declines significantly, the loan is transferred from stage 1 to stage 2. If the decline persists and the loan goes into default, it is moved into stage 3. Unfortunately, the default may be cured, causing credit ratings to go up, in which case the loan can be transferred back to stage 2 or stage 1.

When the drivers of the PD and LGD are changed, the 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 multiple parameters that influence the PD and LGD:

  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. Changes in individual loan or advance behaviour such as changes in rating not triggering stage transfer or loan amount due to repayment.

The total expected credit loss allowances can be broken down as follows:

 

2021

Total expected credit loss allowances

Stage 1

Stage 2

Stage 3

Total

ECL loans and advances to banks at amortised cost

24

-

-

24

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

8,058

3,057

36,787

47,902

ECL loans and advances to customers at amortised cost - Mortgages

617

361

100

1,078

ECL debt securities at amortised cost

10

-

-

10

ECL financial guarantees

21

-

-

21

ECL loan commitments issued

1,103

292

-

1,395

ECL other assets

12

-

1,107

1,119

Total expected credit loss allowances

9,845

3,710

37,994

51,549

 

2020

Total expected credit loss allowances

Stage 1

Stage 2

Stage 3

Total

ECL loans and advances to banks at amortised cost

18

-

-

18

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

7,287

9,061

32,972

49,320

ECL loans and advances to customers at amortised cost - Mortgages

861

323

466

1,650

ECL debt securities at amortised cost

63

-

-

63

ECL financial guarantees

14

-

-

14

ECL loan commitments issued

1,025

1,208

-

2,233

ECL other assets

10

-

695

705

Total expected credit loss allowances

9,278

10,592

34,133

54,003

The following tables present the movements of these ECL allowances per financial instrument.

The first table shows the movement in ECL allowance for loans and advances to banks at amortised cost. There have been no rating changes for banks, and no change in credit risk, from issuance of current outstanding balance. As a result, everything remains within stage 1.

 

2021

2020

ECL loans and advances to banks at amortised cost

Stage 1

Stage 1

Balance at 1 January

18

42

Net remeasurement of allowance for expected credit losses

6

-24

Net portfolio growth

-

-

Balance at 31 December

24

18

The following table shows the movements within the ECL for business loans and current accounts. The allowance for expected credit losses in this table includes ECL on off-balance sheet loan commitments for certain retail products such as credit cards and overdrafts, because Triodos Bank determines the ECL per exposure, including any loan commitment component.

 

2021

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

7,287

9,061

32,972

49,320

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

-610

-5,868

5,979

-499

of which:

 

 

 

 

- Effect of transition between stages

853

-307

395

941

- Macro-economic forward-looking impact

-3,766

-6,566

-

-10,332

- Update ECL model

938

-457

-

481

- Individual loan or advance behaviour

1,365

1,462

5,584

8,411

 

 

 

 

 

Net portfolio growth

1,301

-237

-

1,064

Other transfers

-

-

-

-

Write-offs

-

-

-2,306

-2,306

Exchange rate differences

80

101

142

323

Balance at 31 December

8,058

3,057

36,787

47,902

 

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

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

1,658

7,093

10,047

18,798

of which:

 

 

 

 

- Effect of transition between stages

-1,558

5,357

45

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

8,208

 

 

 

 

 

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

 

2021

ECL loans and advances to customers at amortised cost – Mortgages

Stage 1

Stage 2

Stage 3

Total

Balance at 1 January

861

323

466

1,650

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

-375

-31

-366

-772

of which:

 

 

 

 

- Effect of transition between stages

-2

41

-

39

- Macro-economic forward-looking impact

-150

-80

-

-230

- Update ECL model

-160

20

-

-140

- Individual loan or advance behaviour

-63

-12

-366

-441

 

 

 

 

 

Net portfolio growth

131

69

-

200

Balance at 31 December

617

361

100

1,078

 

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

 

 

 

 

 

Net remeasurement of allowance for expected credit losses

156

74

170

400

of which:

 

 

 

 

- Effect of transition between stages

-1

-56

13

-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

For the movements within the ECL for business loans, current accounts, and mortgages together, refer to note 3 Loans and advances to customers.

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

 

2021

2020

ECL debt securities at amortised cost

Stage 1

Stage 1

Balance at 1 January

63

34

Net remeasurement of allowance for expected credit losses

-

6

Net portfolio growth

-54

23

Foreign exchange and other movements

1

-

Balance at 31 December

10

63

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

 

2021

2020

ECL financial guarantees

Stage 1

Stage 1

Balance at 1 January

14

19

Net remeasurement of allowance for expected credit losses

7

-5

Net portfolio growth

-

-

Foreign exchange and other movements

-

-

Balance at 31 December

21

14

Loan commitments issued result in issued loans when offers are signed or when commitments are used. The following table shows the movements within the ECL for loan commitments.

 

2021

ECL loan commitments issued

Stage 1

Stage 2

Total

Balance at 1 January

1,025

1,208

2,233

 

 

 

 

Net remeasurement of allowance for expected credit losses

102

-904

-802

of which:

 

 

 

- Macro-economic forward-looking impact

-26

-575

-601

- Update ECL model

128

-329

-201

- Individual commitment behaviour

-

-

-

 

 

 

 

Net portfolio growth

-37

-28

-65

Foreign exchange and other movements

13

16

29

Balance at 31 December

1,103

292

1,395

 

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

Foreign exchange and other movements

-

-

-

Balance at 31 December

1,025

1,208

2,233

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, refer to 29 Impairment result on financial instruments.

 

2021

Impairment losses on financial instruments

Stage 1

Stage 2

Stage 3

Total

Loans and advances to banks

6

-

-

6

Loans and advances to customers

447

-6,067

5,613

-7

Debts securities at amortised cost

-53

-

-

-53

Financial guarantees

7

-

-

7

Loan commitments issued

65

-932

-

-867

Other assets

3

-

411

414

Impairment losses on financial instruments for the year

475

-6,999

6,024

-500

 

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

Triodos Bank has an annual incurred loss rate of 0.06% (2020: 0.12%) The annual incurred loss rate is the ratio of stage-3 impairment losses over the average loan book.

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.

 

2021

2020

Credit-impaired loans and advances to customers at 1 January

33,438

28,307

Addition

11,662

14,125

Write-off

-2,306

-4,287

Release

-6,049

-3,908

Other transfers

-

-696

Exchange rate differences

142

-103

Balance sheet value as at 31 December

36,887

33,438

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.

 

2021

2020

Financial assets modified during the period

 

 

Amortised cost before modification

92,441

65,730

Net modification loss

-27

7

Offsetting financial assets and financial liabilities

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

The International Swaps and Derivatives Association (ISDA) and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create 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 2021 and is expected to increase with the further growth of Triodos Bank.

Collateral needs stemming from FX forwards increased in 2021 because of EUR/GBP exchange rate developments. At the end of 2021, a total net amount of EUR 13.5 million cash collateral was posted (2020: EUR 7.1 million).

Interest rate swaps which are centrally cleared, increased the potential collateral needs as well during the year. At the end of 2021 a total net amount of EUR 25.8 million cash collateral was posted (2020: EUR 12.6 million). The cash collateral posted as part of the ISDA agreement as mentioned above, is eligible for the counterparty in case of default.

Debt securities and loans are used as collateral with the Dutch Central Bank for a possible debit balance and participation in open market operations of the European Central Bank. At the end of 2021, Triodos Bank participated in two longer-term refinancing operations (TLTRO) for an amount of EUR 1,550 million. A collateral value of EUR 1,749 million was placed with the Dutch Central Bank (2020: EUR 878 million).

Liquidity risk

Liquidity risk management

Triodos Bank only lends to and invests in sustainable enterprises in the real economy. Funds are attracted from depositors and shareholders. In 2021, Triodos Bank issued a green subordinated Tier 2 bond (Tier 2 capital) with a nominal amount of EUR 250 million which diversifies the capital and funding base of the bank.

Triodos Bank does not invest in complex financial instruments with leverage features. The growth of the bank is primarily driven by steadily growing sustainable lending (asset side) and solid growth of funds entrusted (liability side). Triodos Bank is managing a sufficient liquidity buffer supporting a healthy and resilient liquidity coverage ratio (LCR). Triodos Bank does not act as correspondent bank, which minimises liquidity shortages during the day.

As a mid-sized European bank with total funds entrusted of EUR 13,285 million per the end of December 2021, liquidity risk is an important risk for Triodos Bank. The bank has intensively worked on the development of a solid liquidity framework always to have 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. Triodos Bank also issued a Green Subordinated Tier 2 bond with a nominal amount of EUR 250 million in 2021.

The liquidity portfolio increased in 2020 and in 2021 due to our participation in the Targeted Longer-Term Refinancing Operation (TLTRO) of the euro system in anticipation of potential (temporary) higher credit demand from Triodos Bank’s clients. Triodos Bank’s policy is to hold a sound liquidity buffer. Liquidity is invested according to Triodos Bank’s minimum standards on sustainability, in highly liquid assets and (short-term) cash loans, which count as inflow in the Liquidity Coverage Ratio (LCR) 30 days before maturity, if the risk-return is more favourable than having the liquidity placed with the central banks. Around one-third of our liquidity is invested, mainly in bonds and to a small extent in cash loans. The rest is mainly at the current accounts of the national central banks of Triodos Bank’s local business units and, to some extent, at sight with commercial banks to facilitate payment systems. Most bonds qualify as High-Quality Liquid Assets (HQLA) 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 reasons of diversification.

Liquidity risk management organisation

Triodos Bank has adopted the three lines of defence model as the basis for managing the risks within the organisation. The three lines of defence model is an internal control and risk management approach that helps the bank to strengthen, clarify and coordinate its essential governance, internal control and risk management roles and responsibilities. It helps to define clear responsibilities of business operations (first line), risk and compliance (second line), and the internal audit function (third line). For liquidity risk, the Treasury department is as owner of liquidity risk, the first line of defence. The Group Risk department performs the second line of defence role and the Internal Audit department performs the third line of defence

Daily liquidity management is currently executed at banking entity level. This reflects Triodos Bank's business strategy of keeping this process close to client-related activities so as to be able to provide detailed cash forecasts. At the aggregated level, Group Treasury monitors the liquidity buffer versus the internal limits daily.

Triodos Bank has committees in place with the following roles:

  • The Enterprise Risk Committee is the delegated body taking decisions on strategic risk, business risk and reputation risk of Triodos Bank as a whole. Liquidity risk is a focus area within that. General roles and responsibilities are defined in the Enterprise Risk Committee charter.

  • For managing liquidity risk, the Asset and Liability Committee serves as delegated body by the Executive Board to monitor and take decisions related to the management of liquidity risk positions of Triodos Bank to make sure that they are in line with the defined liquidity risk appetite. General roles and responsibilities are defined in the Asset and Liability Committee charter.

The management of the liquidity position under ‘normal’ conditions is described in the Liquidity Risk Management policy. Whenever circumstances require an exception to this policy, which is nevertheless prudent, the Chief Financial Officer (CFO) is authorised to approve this. No such exception may be authorised, however, if it would cause the bank to violate an applicable law or regulation. All authorised policy exceptions must be reported to the Asset and Liability Committee and must be affirmed by the Asset and Liability Committee.

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 business units on a daily basis. Secondly, the detailed liquidity position is reported to the Chief Financial Officer (CFO) and Chief Risk Officer (CRO) 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 liquidity placements, investments and the investment portfolio, where the goal is to optimise the risk-return trade off 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 DNB 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 position of Triodos Bank in a ‘stressed situation’. This includes liquidity stress indicators and trigger levels for management actions.

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

Stress testing

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.

The EB has delegated responsibility to the Asset and Liability Committee with regard to the overall management and procedure of liquidity stress testing. The liquidity stress testing within the framework of the mandate is delegated to Group Modelling and Valuations. Therefore, Group Modelling and Valuations has responsibility and accountability to the Asset and Liability Committee.

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 Basel Committee on Banking Supervision / European Banking Authority principles. An integrated overview of the Group cash position and liquidity metrics is available on a daily and weekly basis.

Liquidity Risk Statement

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 13,285 million at year-end 2021 of which 79.4% are deposits insured by the deposit guarantee scheme.

In 2021, Triodos Bank increased its collateral position at DNB to participate in a second Targeted Long-Term Refinancing Operation of the euro system. This additional collateral consists of ECB-eligible bonds. 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), which are cash collateral requirements.

Interest rate swaps which are centrally cleared, increased the potential collateral needs as well during the year. At the end of 2021 a total net amount of EUR 25.8 million cash collateral was posted (2020: posted EUR 12.6 million) based on the combined variation and initial margin requirements. This cash collateral is posted as part of the ISDA agreement as mentioned above, eligible for the counterparty in case of default.

Debt securities and loans are used as collateral with the Dutch Central Bank for a possible debit balance and participation in open market operations of the European Central Bank. At the end of 2021, Triodos Bank participated in two longer-term refinancing operations (TLTRO) for an amount of EUR 1,550 million. In total an amount of EUR 1,749 million was placed as collateral with the Dutch Central Bank (2020: EUR 878 million).

The liquidity risk appetite as determined by the Executive Board 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 three lines of defence organisational structure, with independent control, compliance, audit and risk management functions, ensures a clear division of tasks, power and responsibility is in place.

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 Basel Committee on Banking Supervision (BCBS)/EBA principles considering its sustainable profile, the very strong relationship with its customers, the granularity of funds entrusted and its conservative and robust liquidity management framework that is integrated in the business processes.

Triodos Bank has a sufficient, good quality liquidity buffer resulting in a proper Liquidity Coverage Ratio (LCR) and a proper Net Stable Funding Ratio (NSFR) above regulatory minimum requirements. In all liquidity stress-test scenarios (with the exception of reverse stress-test scenarios) Triodos Bank has sufficient liquidity to survive the total stress period.

The continuing 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 and the relatively high costs of holding that liquidity is becoming more important and pressuring the bank's overall profitability.

Securitisation

In 2019, Triodos executed its first retained residential mortgage-backed securities (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 (SPV). 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 Bank is the sole buyer of the issued notes and as such has not transferred any credit risk. Through the retained RMBS, Triodos Bank strengthens its financial resilience and gains additional access to (central bank) liquidity by pledging the notes as collateral with DNB. The Sinopel RMBS is collateralised by Dutch residential mortgage loans. The structure is fully compliant with the EU’s STS regulation. DBRS Ratings Limited and S&P Global Ratings Europe were external credit assessment institutions (ECAIs) for notes issued by Sinopel 2019 B.V.

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 Bank consolidates Sinopel in its annual accounts.

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

The notes of the securitisation are pledged as collateral. The carrying amount of the financial assets pledged as collateral is EUR 568.8 million (2020: 638.7 million).

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.

2021

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

4,277,589

-

-

-

-

-

4,277,589

Loans and advances to banks

145,217

1,426

-

119,153

-

-

265,796

Loans and advances to customers

186,558

520,850

896,227

3,600,046

4,964,117

-

10,167,798

Debt securities at amortised cost

54,289

26,290

399,691

801,118

201,990

-

1,483,378

Investment securities

-

-

-

-

-

39,976

39,976

Non-trading derivatives

-

-

695

1,104

17,851

-

19,650

Other assets2

32,812

10,571

4,807

3,734

3,727

194,347

249,998

Total assets

4,696,465

559,137

1,301,420

4,525,155

5,187,685

234,323

16,504,185

 

 

 

 

 

 

 

 

Financial liability by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banks

13,460

2,815

1,536,708

14,513

40,810

-

1,608,306

Deposits from customers

12,460,790

355,454

279,934

155,121

33,773

-

13,285,072

Non-trading derivatives

1,176

1,408

1,083

3,166

114

-

6,947

Debt issued and other borrowed funds

-

-

916

-

254,699

-

255,615

Other liabilities3

48,707

7,566

17,122

16,433

8,018

277

98,123

Total liabilities

12,524,133

367,243

1,835,763

189,233

337,414

277

15,254,063

 

 

 

 

 

 

 

 

off-balance sheet liabilities by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent liabilities

3,033

325

6,676

11,197

50,813

-

72,044

Irrevocable facilities

116,740

53,068

251,860

788,548

902,908

-

2,113,124

Total off-balance sheet liabilities

119,773

53,393

258,536

799,745

953,721

-

2,185,168

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.

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

14,048

-

-

164,611

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 assets2

26,310

12,258

3,840

2,113

5,328

211,130

260,979

Total assets

3,250,162

672,611

1,058,470

4,077,174

4,587,636

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 liabilities3

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

 

 

 

 

 

 

 

 

off-balance sheet liabilities by type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

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 guarantees 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, however early repayment options and refinancing is expected within the mortgage portfolio.

Liquidity reserves

 

2021

2020

 

Carrying amount

Carrying amount

Balances with central banks

4,277,589

2,955,787

Cash and balances with other banks

265,796

164,611

Unencumbered debt securities issued by sovereigns

191,736

877,246

Undrawn credit lines granted by central banks1

223,772

139,143

Other assets eligible for use as collateral with central banks

258,308

245,977

Total liquidity reserves

5,217,201

4,382,764

1

The amount is the actual credit line available.

Financial assets available to support future funding

 

Pledged as collateral

2021

Encumbered

Unencumbered

Total

Cash and cash equivalents

-

4,277,589

4,277,589

Loans and advances to banks

118,161

147,635

265,796

Debt securities at amortised cost

1,089,745

393,633

1,483,378

Loans and advances to customers

757,482

9,410,316

10,167,798

Investment securities

-

39,976

39,976

Non-financial assets

-

269,648

269,648

Total assets

1,965,388

14,538,797

16,504,185

 

Pledged as collateral

2020

Encumbered

Unencumbered

Total

Cash and cash equivalents

-

2,955,787

2,955,787

Loans and advances to banks

41,862

122,749

164,611

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

-

262,774

262,774

Total assets

1,014,137

12,874,260

13,888,397

The increase in encumbered assets is caused by debt securities posted at the Dutch Central Bank as collateral under TLTRO III. In addition, Triodos Bank has an obligation to maintain a reserve with local central banks. As at 31 December 2021, the minimum mandatory reserve deposits with various central banks amount to EUR 115,850 (2020: EUR 102,245 ).

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 FX rates in particular. Interest rate risk is present in the banking book.

FX risk is the current or prospective risk to earnings and capital that arises from adverse movements in FX 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 FX position is monitored at least monthly and discussed in the Asset and Liability Committee. Limits are agreed by the Asset and Liability Committee.

Market risk structure and organisation

Triodos Bank has exposure to credit risk resulting from outstanding 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 FX risk of these funds’ investments.

Triodos Bank has limited exposure to credit risk resulting from outstanding 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.

Interest rate risk in the banking book

Interest rate risk in the banking book (IRRBB) is inherent in regular customer-related banking activities, due to the fact that short-term funding is invested in long-term loans. Triodos Bank uses mainly retail funding to finance clients and projects which aim to improve society and the environment. In addition, the bank has issued a green subordinated Tier 2 bond in 2021 to diversify its capital and funding base.

Triodos Bank defines 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 from changes in the difference between two or more rates for different financial instruments with the same interest maturity but with 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 financial instruments, due to explicit or implicit optionality embedded in the bank’s products.

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 local balance sheet development in the individual banking business units is an important driver for how the interest rate risk position develops. Each banking business unit sets up a budget for the next three years and updates it on a quarterly basis with a forecast. The budgets are consolidated and compliance with the risk appetite is checked. Hedging is applied to keep the risk position within the risk appetite and regulatory limits. Adherence to the budget means that asset and liability management is predictable and therefore the fulfilment of the budget is closely monitored.

Interest rate risk management and mitigation strategies

Triodos Bank manages its interest rate risk position in three ways.

  • Firstly, Triodos Bank is able to steer the volume and interest rate terms of new assets and the interest rate of its liabilities to a limited extent 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 swaps (IRS) 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, subject to hedge accounting to avoid P&L volatility.

Monitoring and decision-making related to the management of the IRRBB is delegated to the Asset and Liability Committee (ALCo). Additionally, the Model and Assumptions Review Committee (MARC) 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 Triodos Bank’s main strategic risks is the low interest rate environment. Although there is upward pressure due to increasing inflation, relatively 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. The threshold for negative rates on savings and current accounts has been lowered in several market segments over the last year. At the same time, fees on savings accounts were introduced and/or increased to be able to deal with the margin compression.

Benchmark reform

Triodos Bank has robust written plans in place per business unit and product as referred to in Article 28(2) of the EU Benchmarks Regulation (BMR). It details (1) the operational procedures that apply in case the benchmark would materially change or cease to exist , and (2) the organisational arrangements for continuously monitoring relevant developments in respect of the underlying benchmark. Risks associated with benchmark reform did not result in changes to the underlying risk management strategy. The benchmark reform will also not have a material effect on the underlying products of Triodos Bank.

Main measures

Triodos Bank uses various indicators to measure interest rate risk. The interest rate risk position is monitored by the ALCo on a monthly basis and reported quarterly to the Executive Board. The main IRRBB indicators used are earnings at risk (also referred to as net interest income (NII) at risk), economic value of equity at risk, modified duration of equity, and gap analysis. Below follows a brief description:

  • Net interest income 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 (EVE) in the event of an interest rate shock. EVE is defined as the net present value of the future cash flows of all assets netted with the net present value of the future cash flows of liabilities.

  • Supervisory outlier test: this is the economic value of equity at risk relative to either CET-1 or Actual Own Funds, for several interest rate shocks as specified in the EBA Guidelines on IRRBB.

  • Modified duration of equity: an indicator that expresses the sensitivity of the EVE in the event of parallel interest rate changes.

  • Gap analysis: this provides a quick and intuitive sense of how Triodos Bank 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 arises from 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 continued growth of the mortgage portfolio, Triodos Bank continues to work on improving the data and modelling of off-balance commitments. Fixed-rate commitments in particular (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 curve. 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 measures complies with the EBA guidelines. The balance sheet in Triodos Bank’s model develops according to the budget/forecasts for earnings calculations and uses a 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.

First, 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 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 business units. Triodos Bank is using sensitivity analyses to measure the correlation between interest rate levels and prepayment behaviour.

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 also considered.

The EVE measures, duration of equity and outlier criterion measures are determined using risk-free discounting and commercial margins. Other spread components are excluded from the cash flow calculations.

Interest rate risk is hedged through the purchase of interest rate swaps. On a monthly basis an assessment is made of the need to hedge based on the current interest rate risk position, the forecasted position, and market circumstances.

Triodos Bank applies macro hedge accounting to its interest rate hedges to solve the accounting asymmetry between the portfolio of hedged items (loans and mortgages) measured at amortised cost, and the interest rate derivatives measured at fair value through the profit and loss statement. As a consequence hedge ineffectiveness is automatically reflected in the P&L.

Explanation of the significance of the IRRBB measures and significant variations

Economic value of equity at risk declined in 2021. Triodos Bank hedged its position with interest rate derivatives, and a recalibration of the prepayment parameter led to slightly higher prepayment speeds. On the other hand, continuing growth in the mortgage portfolio, and a decline in duration of savings accounts due to somewhat higher yield curves increased Triodos Bank's vulnerability to rate rises at the long end of the curve. All in all, EVE at Risk, as measured under a steepener scenario, decreased from 15.0% to 7.7%.

Net interest income at risk decreased in 2021 as well, from 2.8% to 1.2%. The scenarios were updated in 2021, reflecting the latest interest rate outlook. This means the scenario became less severe at the short end of the curve and more severe at the long end. A negative shock at the short end of the curve immediately impacts Triodos Bank’s interest income due to the interest paid on cash positions.

Changes in net interest income, as disclosed in template EUR IRRBB1 are measured with the following assumptions:

  • The upward scenario reflects a parallel up shock of 200 basis points, and the downward scenario the expected interest rate movement in a depression scenario.

  • Both shocks are applied gradually over a period of 12 months.

  • The magnitude of the downward scenario is updated frequently and based on the latest interest rate outlook.

  • In both scenarios no floors are applied to the market interest rates.

  • The net interest income sensitivity is measured over a period of 12 months.

  • Projected future volumes of the different balance sheet items are used in the calculations.

The average repricing maturity assigned to non-maturity deposits is 2.7 years, and the longest assigned repricing maturity assigned is equal to 7 years.

Below follows a short summary of the main developments in the main interest rate risk indicators.

Net interest income at Risk

Net interest income at Risk is measured with a one- and two-year horizon. One-year net interest income at risk decreased from 2.8% to 1.2% in 2021, and two-year net interest income at risk from 5.6% to 4.4%. Both indicators show their worst-case outcome in a scenario where the economy moves into recession and interest rates decrease. The scenarios were updated in 2021, reflecting the latest interest rate outlook. This means the scenario became less severe at the short end of the curve and more severe at the long end. A negative shock at the short end of the curve immediately impacts Triodos Bank’s interest income due to the interest paid on cash positions.

Supervisory outlier test

In 2021, the supervisory outlier test decreased from 17.2% to 8.7%. The decrease came mainly from purchases of interest rate swaps during the year. In addition, a recalibration of the prepayment parameters led to slightly higher prepayment speeds and lowered the position further. On the other hand, the continuing growth in mortgages in 2021, from EUR 2.7 billion to EUR 3.6 billion was the main factor putting upward pressure on this indicator. A decrease in the duration of savings accounts, due to higher market interest rates, created upward pressure as well. The supervisory outlier test worst-case outcome is measured in the steepener scenario where short rates decline and long rates increase.

EVE-at-Risk

EVE-at-Risk decreased during the first half of the year and slowly started rising again in the second half. The drivers behind the development of the supervisory outlier test and EVE-at-Risk are similar, i.e., upward pressure due to continued mortgages production and a decrease in duration of savings, and downward pressure due to the purchase of interest rate swaps and higher prepayment speeds. All in all, EVE-at-Risk decreased from 15% to 7.7% in 2021. As with the supervisory outlier test, the steepener scenario is the worst-case scenario for EVE-at-Risk.

Duration of equity

Duration of equity decreased from 6.3 to 3.2 years over the course of 2021. The developments resembled that of EVE-at-Risk, i.e. a decline in the first half of the year, and a slow increase in the second half. The underlying drivers are similar to those for the supervisory outlier test and EVE-at-Risk, although a difference is that duration of equity is calculated under the assumption of a parallel shift in interest rates.

Quantitative market risk disclosures

Interest rate risk in the banking book

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

2021

Floating-
rate

<= 3
months

<=
1 year

<=
5 years

>
5 years

Total

Interest-bearing assets

 

 

 

 

 

 

Cash

4,277,972

-

-

-

-

4,277,972

Banks

145,276

1,427

-

119,161

-

265,864

Loans

1,194,547

842,981

1,679,114

3,290,098

3,181,410

10,188,150

Hedged loans

12,500

600,200

362,900

-113,400

-862,200

-

Interest-bearing securities

-

98,104

391,805

828,236

124,218

1,442,363

Total

5,630,295

1,542,712

2,433,819

4,124,095

2,443,428

16,174,349

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

1,551,364

4,143

6,896

20,470

41,047

1,623,920

Subordinated loans

-

-

-

6,822

247,876

254,698

Funds entrusted

9,555

1,611,065

2,079,901

6,741,792

2,852,440

13,294,753

Total

1,560,919

1,615,208

2,086,797

6,769,084

3,141,363

15,173,371

2020

Floating-
rate

<= 3
months

<=
1 year

<=
5 years

>
5 years

Total

Interest-bearing assets

 

 

 

 

 

 

Cash

2,956,179

-

-

-

-

2,956,179

Banks

148,160

1,453

-

14,000

1,000

164,613

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

4,290,921

1,212,458

1,890,616

3,418,354

2,816,609

13,628,958

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

Banks

750,220

1,312

9,264

24,258

31,910

816,964

Subordinated loans

-

-

-

-

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

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 is shown. 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.

2021

Cash position
Debit

Cash position
Credit

Term position
Debit

Term position
Credit

Net position
Debit

Net position
Credit

GBP

2,143,735

1,918,230

-

221,436

4,069

-

USD

17,671

382

5,277

5,277

17,289

-

NOK

100

-

-

-

100

-

AUD

1

-

-

-

1

-

SEK

52

-

-

-

52

-

INR

-

-

4,453

4,453

-

-

Total

2,161,559

1,918,612

9,730

231,166

21,511

-

Net open foreign currency position (total of net positions debit and credit): EUR 21,511 thousand.

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

-

-

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): EUR 28,593 thousand.

Capital management

Regulation and capital requirements

The 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. As Triodos Bank is formally domiciled in the Netherlands, the Dutch implementation of the Capital Requirements Directive IV is applicable.

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. All subsidiaries are included in the consolidation. Triodos Bank has not made use of a derogation option with regard to the application of prudential requirements on an individual basis.

Capital requirements

Triodos Bank calculates its internal capital adequacy requirements based on minimum requirements (pillar 1) and supplemented with additional capital charges (pillar 2), as described in the Capital Requirements Regulation.

The Total Capital Ratio increased by 2.5% from 18.8% at the year-end 2020 to 21.3% at the year-end 2021. This ratio is well above the regulatory minimum requirement. In October 2021, Triodos Bank issued a green subordinated Tier 2 bond in the amount of EUR 250 million to further strengthen and diversify its capital base. This green bond qualifies as Tier 2 capital in line with prudential regulations.

Minimum capital requirements (pillar 1)

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 for calculating its minimum capital requirements for credit risk and the Financial Collateral Simple Method for credit risk mitigation. The risk-weighted asset calculations apply to 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 FX risk. The requirement is calculated as the sum of the bank’s overall net FX position, multiplied by 8%. Triodos Bank only accepts limited net FX 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 (IRRBB), model risk and operational risk. The total capital requirement consists of the pillar 1 and 2 requirements and these combined buffer requirements.

Internal capital

The capital strategy of Triodos Bank is assessed 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 business units. The ICAAP is subject to the SREP of DNB 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 strategy

Triodos Bank aims for a sound and resilient capital base supporting our sustainable and conscious lending growth strategy.

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);

  • allocating sufficient capital to its business units; and

  • ensuring compliance with all applicable capital legislation and regulation at all times.

Triodos Bank’s solvency comes from Common Equity Tier 1 (CET-1) capital and Tier 2 capital.

Capital allocation and monitoring

Equity is allocated to banking business units in the yearly budget and planning process based on the forecasted return on risk-weighted assets, contribution to our mission and dynamic sector strategy. 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 capital adequacy. The Asset and Liability Committee also assesses whether available capital is sufficient to support current and future bank activities on a monthly basis.

During 2021, available capital has been at sufficient levels at all times in line with external regulatory minimum requirements. A retained portion of the 2021 profit will be added to reserves in 2022.

Management of excessive leverage

The risk of excessive leverage is managed inclusively in Triodos Bank’s Capital Management strategy and procedures. Triodos Bank aims for a sound capital base by avoiding high leverage risks.

Triodos Bank's risk appetite level related to the leverage ratio is set at 5%, which is significantly above all regulatory requirements. At year end, the relevant capital used to calculate the leverage ratio consists only of CET-1 capital. Triodos Bank’s capital base to calculate the leverage ratio is therefore not subject to refinancing risks. The leverage ratio is part of Triodos Bank’s three-year budget. Compliance with Triodos Bank’s risk appetite level is part of the budget requirements.

Triodos Bank has participated in the TLTRO tender III.5 and tender III.7 which would normally decrease the leverage ratio. However, in 2020 the ECB published a new regulation so that amounts placed with central banks can be left out of the leverage ratio calculation. Triodos Bank benefits from this relief measure until end-March 2022.

The decrease in the leverage ratio in 2021 is a direct result of the capital strategy of Triodos Bank. In order to diversify the capital base, Triodos Bank issued a green subordinated Tier 2 bond in 2021 with a nominal amount of EUR 250 million. The issuance of that inaugural Tier 2 bond, if used to finance loans, results in a decrease of the leverage ratio by 0.15 percent points. The leverage ratio is mainly impacted due to loan portfolio growth while the Tier 1 capital increased only marginally in 2021. This reflects the capital strategy of Triodos Bank to improve the usage of its Tier 1 capital to further develop the sustainable loan portfolio.

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, based on 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, with account taken of 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 includes caps and/or floors on interest rates. The fair value of other assets and liabilities is assumed to be equal to the balance sheet value.

Investment 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 our 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 cash flows 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. There have been no transfers of financial instruments between different levels during the reporting period.

2021

Level 1

Level 2

Level 3

Total

Derivative assets held for risk management

 

 

 

 

Interest rate

-

17,983

-

17,983

Foreign exchange

-

1,667

-

1,667

Total

-

19,650

-

19,650

 

 

 

 

 

Investment securities

 

 

 

 

Equities

11,739

13,784

4,705

30,228

Debt

-

5,463

-

5,463

Total

11,739

19,247

4,705

35,691

 

 

 

 

 

Derivative liabilities held for risk management

 

 

 

 

Interest rate

-

2,757

-

2,757

Foreign exchange

-

4,190

-

4,190

Total

-

6,947

-

6,947

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

Level 3 valuations relate to participating interest which are valued at fair value through other comprehensive income. Total fair value changes amount to EUR 135 (2020: EUR -420).

Financial instruments not measured at fair value

The following table sets out the dirty 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. The dirty fair value includes the current interest accrual.

2021

Level 1

Level 2

Level 3

Total Fair Values

Total Carrying

Assets

 

 

 

 

 

Debt securities at amortised cost

1,407,965

85,174

-

1,493,139

1,483,378

Loans and advances to banks

-

-

266,300

266,300

265,796

Loans and advances to customers

-

-

10,357,966

10,357,966

10,167,798

Investment securities

4,285

-

-

4,285

4,285

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits from banks

-

-

1,605,889

1,605,889

1,608,306

Deposits from customers

-

-

13,276,234

13,276,234

13,285,072

Debt issued and other borrowed funds

-

-

255,233

255,233

255,615

Lease liabilities

-

-

19,730

19,730

17,425

2020

Level 1

Level 2

Level 3

Total Fair Values

Total Carrying

Assets

 

 

 

 

 

Debt securities at amortised cost

1,230,304

119,339

-

1,349,643

1,317,301

Loans and advances to banks

-

-

150,616

150,616

164,611

Loans and advances to customers

-

-

9,414,780

9,414,780

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

The amounts in the annual report 2020 represented the clean fair values, for comparison reasons the fair values have been adjusted to dirty fair values, therefore including the current interest accrual at the end of 2020.

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.

2021

Mandatorily at FVTPL

Designated as at FVTPL

FVOCI – equity instruments

Amortised cost1

Total carrying amount

Cash and cash equivalents

-

-

-

4,277,589

4,277,589

Debt securities at amortised cost

-

-

-

1,483,378

1,483,378

Loans and advances to customers

-

-

-

10,167,798

10,167,798

Loans and advances to banks

-

-

-

265,796

265,796

Investment securities

5,463

-

30,228

4,285

39,976

Other assets

-

-

-

249,998

249,998

Derivative assets held for risk management

19,650

-

-

-

19,650

Total financial assets

25,113

-

30,228

16,448,844

16,504,185

 

 

 

 

 

 

Derivative liabilities held for risk management

6,947

-

-

-

6,947

Deposits from banks

-

-

-

1,608,306

1,608,306

Deposits from customers

-

-

-

13,285,072

13,285,072

Lease liabilities

-

-

-

17,425

17,425

Other liabilities

-

-

-

336,313

336,313

Total financial liabilities

6,947

-

-

15,247,116

15,254,063

1

The amortised cost column also includes other valuation principles to create the reconciliation with the balance sheet (e.g. equity method, historical cost). See the accounting principles for all valuation principles applied.

2020

Mandatorily at FVTPL

Designated as at FVTPL

FVOCI – equity instruments

Amortised cost1

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

-

-

-

164,611

164,611

Investment securities

4,461

-

26,753

-

31,214

Other assets

-

-

-

260,979

260,979

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

1

The amortised cost column also includes other valuation principles to create the reconciliation with the balance sheet (e.g. equity method, historical cost). See the accounting principles for all valuation principles applied.

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.

 

2021

2020

 

Assets

Liabilities

Assets

Liabilities

Instrument type

 

 

 

 

Interest rate

 

 

 

 

Designated in fair value hedges

17,675

2,757

-

6,344

Other derivatives

308

-

24

-

Total interest rate

17,983

2,757

24

6,344

 

 

 

 

 

Foreign exchange

 

 

 

 

Designated in a net investment hedge

-

2,568

-

2,407

Other derivatives

1,667

1,622

1,771

1,701

Total foreign exchange

1,667

4,190

1,771

4,108

 

 

 

 

 

Total non-trading derivatives

19,650

6,947

1,795

10,452

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). As of 1 January 2020, Triodos Bank applies the EU carve-out under IAS 39.

Triodos Bank applies macro fair-value hedge accounting, designating hedge items and hedging instruments on a portfolio basis into fair-value hedge relationships.

Triodos Bank determines hedged items by identifying portfolios of homogeneous 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 changes in fair value of hedged item and hedging instrument are 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 deltas in fair value between hedging instrument and hedged item as per designation date and as per period end date are in the 80% – 125% bandwidth, 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 de-designation, 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 related 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

2021

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Interest rate swaps – portfolio hedge accounting

1,042,400

17,675

2,757

20,525

34

2021

Nominal amount

Fair value hedge adjustments

Hedged item

Assets

Debit adjustment

Credit adjustment

Change in fair value

Loans and advances to customers

1,042,400

-

14,709

-20,491

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Interest rate swaps – portfolio hedge accounting

295,175

-

6,344

-2,216

111

2020

Nominal amount

Fair value hedge adjustments

Hedged item

Assets

Debit adjustment

Credit adjustment

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 to hedge the currency risk of the UK subsidiary equity participation of Triodos Bank. In order to maintain an effective hedging relationship, the hedge may be lower than the full value of the UK subsidiary equity participation. Triodos Bank hedges up to a maximum of 100% of the UK subsidiary.

Triodos Bank discloses its risk management related 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.

2021

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Foreign currency forward contracts (EUR:GBP)

186,300

-

2,568

13,120

-

2021

 

Carrying amount

 

 

Hedged item

Nominal amount

Assets

Liabilities

Change in fair value

Foreign currency translation reserve

GBP net investment in UK subsidiary

186,886

222,140

-

-13,196

-4,364

2020

 

Carrying amount

 

 

Hedging instruments

Nominal amount

Assets

Liabilities

Change in fair value

Ineffective-
ness

Foreign currency forward contracts (EUR:GBP)

180,100

-

2,407

-10,200

-

2020

 

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