The Global Alliance for Banking on Values (GABV) scorecard provides qualitative and quantitative evidence of the sustainable impact of banks. You can find Triodos Bank’s full scorecard here - www.gabv.org/the-impact/the-scorecard. Here, we report the quantitative impact of Triodos Bank, as a strong indicator of Triodos Bank’s values-based agenda, not least because these measures are linked to Principles of Values Based Banking, established by the GABV and its members (available on the same page above).
These factors provide insights into the three key elements of a bank’s activity, which are fundamental to understanding its focus on values-based banking:
Focus on a triple bottom line of people, planet and prosperity
Focus on the real economy, and
Triodos Bank’s performance in relation to these factors, follows below. The 2018 year figures have been adjusted due changes in the accounting principles. For further explanation see the general accounting principles on page General Accounting policies.
Assets Committed to the Triple Bottom Line to Total Assets
Assets Committed to the Real Economy to Total Assets
Income from the Real Economy to Total Income
Bank Resiliency through Earnings - 3 year Average Return on Assets
Bank Resiliency through Capital - Equity to Total Assets
Bank Resiliency through Asset Quality - Low-quality Assets to Total Assets
Bank Resiliency through Client Based Liquidity – Client Deposits to Total Assets
Triple Bottom Line Assets ratio
This figure provides the best indication of a bank’s commitment to sustainability. Triple Bottom line assets don’t just mean assets in the real economy. They specifically refer to assets focused on positive social, environmental and economic benefits: people, planet and prosperity. This figure relates to assets on the balance sheet only.
Not all assets will be committed, however, because some liquidity needs to be available for the bank to support its clients in case of disruptions in the market such as repaying savings deposited with it, for example. An increase of the triple bottom line assets, in combination with a lower balance sheet total, due to the repayment of the TLTRO funding, explains the higher Triple Bottom Line ratio in 2022 compared to previous years.
Real Economy Assets ratio
Financial exposures can be classified as 'real economy' (as opposed to financial economy) if it is directly linked to a real economy asset or activity. This means that the exposure is aimed at directly supporting the production of goods and services, as opposed to focusing primarily on buying and selling in the financial markets. Values-based banks are strongly and directly connected to financing the real economy because that’s where they can have a positive impact on people’s lives and safeguard the environment. Triodos Bank lends and invests in the real economy for this reason. Real economy assets in a values-based bank should, therefore, be relatively high. By the same token financial economy assets should be relatively low because their impact on people’s lives is, at best, indirect.
In addition to a relatively high real economy assets ratio, Triodos Bank targets a ratio of customer loans (almost all of which are in the real economy) to deposits of 75 to 85% to make sure it always has enough money available (or liquidity) to support its clients in case of disruptions in the market. Where it is possible to do so, and to have access to the banking services we need, this liquidity is invested in line with Triodos Bank’s minimum standards. In 2022 most investments were in ‘neutral’ organisations like municipalities and sovereign debt. An increase of the real economy assets, in combination with a lower balance sheet total, explains the higher Real Economy Assets ratio in 2022 compared to previous years.
Real Economy Income ratio
If a bank is earning more of its income from the real economy, it is both making more of a difference to people’s lives and is a more resilient institution. Income from the financial economy tend to be more volatile, are more removed from most people’s lives, are highly unlikely to be sustainable and mean a bank is less resilient over the long term.
Average Return on Assets ratio
This figure tell you how profitable a bank is and are a good measure of a bank’s operating performance. This is important because sustainable banks need to be resilient financially, in order to deliver long term, positive impact. It is also reasonable to assume that if a bank’s profits are excessively high they may be taking inappropriate risks and may be enjoying unreasonable profits at the expense of their customers.
The three year average Return on Assets is lower for the last three years compared to prior years, mainly caused by the COVID-19 impact on the expenses for expected credit losses (ECL), the expenses related to the MTF listing and the provision for the restructuring.
Equity to Total Assets ratio
This figure tells you how strong a bank is. It includes the total balance sheet, which means it provides a transparent and conservative measure of a bank’s resiliency. This is important for values-based banks which are focused on lasting benefits to society, and want to develop strong capital positions that make them stronger over the long- term.
Other measures, such as risk weighted assets, are used for the same purpose but they are both more complex and less transparent, so the scorecard has chosen to use Equity to Total Assets instead.
As a guide, a benchmark figure of 8% is significantly higher than regulatory requirements. Triodos Bank’s equity to total assets figure has, except for last year, consistently been on or well above this level. In 2022 Triodos Bank increased its equity by 0.7%, or EUR 9 million, from EUR 1,250 million to EUR 1,259 million. This increase is caused by retained net profit. Triodos Bank’s balance sheet total declined by 4% to EUR 15.8 billion (2021: 16.5 billion) caused by the repayment of the TLTRO funding.
Asset Quality ratio
Low quality assets (such as loans to enterprises that struggle to repay them), at levels significantly above the market average, are generally a bad thing for banks because they represent the risk of financial losses in the future. Values-based banks should have strong customer relationships, and have a deep understanding of their activities and the sectors they work in. Together this will limit the chances of loans and investments going wrong in the first place and should make working through challenges with clients easier when problems do occur. Meaningful relationships with customers and precisely this expertise, is at the core of Triodos Bank’s approach to banking.
In 2022, the volume of defaults increased due to the effects of COVID-19, this is the main cause for the increased Asset Quality ratio.
Clients Deposits ratio
Banks finance their assets (such as loans, investments and their wider activities) with money that’s either:
deposited with them by customers,
and/or borrowed from others (mostly other banks) and then lent on to clients,
or sourced from investors.
A large amount of borrowing from the markets to finance a bank’s activity is, by definition, riskier because markets are more volatile. Banks are both stronger and more values-based when more of the money they use to finance their activity comes from customers. High levels of funding from customers’ deposits suggests a strong connection with clients and the real economy – both important elements of a values- based bank.
Triodos Bank funds most of its lending from customers’ deposits.