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 types: 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 client and portfolio level. It operates within a predefined 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 borrower or counterparty. Analysis of compliance 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 and group level, individual files have a second-line review and the portfolio is monitored and reviewed on a continuous basis. 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. Evidence of the implementation is derived from the key controls. Deviations from this policy should be approved via the monthly Central 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 management 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, actively invests in further increasing its knowledge and actively diversifies through geographies.
Triodos Bank focuses primarily on the quality and diversification of its loan portfolio. Triodos Bank puts extra effort into identifying loans to frontrunners with a track record in their sectors, 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.
At Group level, Triodos Bank divides the sector concentration limits into different levels. Specific limits for each sector per country are set by the Executive Board within these levels, taking account of the specific risks of each sector and country. Furthermore, risk-weighted assets (RWAs) are assigned to the different sectors and countries, with regard to these risks, the impact they generates and the return on capital they provides.
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 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.
Obligor risk
An obligor is a single legal entity that commits to the terms and conditions of a loan agreement. The obligor is thoroughly analysed on meeting Triodos Bank’s lending criteria and its capacity to repay a loan. The risk related to the obligor is that it fails to meet its contractual obligations. Obligors are rated through an internal rating methodology.
A thorough assessment of each obligor and the structure of their loan is made before any loan is provided. A review of approved credit is made once a year, as a minimum, to assess the evolution of the client’s capacity to meet its obligations. The high quality of securities (collateral) against outstanding loans reduces credit risk. Examples of principal collateral include: mortgage registrations for business or private properties, securities from public authorities, companies or private individuals, and rights of lien on receivables and/or contracts for projects.
Triodos Bank aims to finance specific projects and assets that are in line with its mission. When financing a project, the bank has a pledge on the underlying contracts. For the financing of objects, Triodos Bank will take a pledge or mortgage on the specific object. It applies haircuts, in all cases, on the market value. The level of this haircut will depend on the marketability of the asset in a negative scenario. This allows Triodos Bank to make a proper assessment of the overall risk of the loan and the value of the asset in case of a downturn. The value of the collateral is reviewed on a yearly basis. An external valuation by an expert is requested, at a minimum every three years, for large loans with a mortgage.
The Triodos Bank early-warning system helps identify problem loans early on, to allow for more available options and remedial measures. Once a loan is identified as being in default (i.e. unlikely to pay or overdue payments beyond 90 days), it is managed under a dedicated remedial process, with a focus on full recovery.
Group exposures
The risk related to a group is that if one obligor fails to meet its contractual obligations, so will the remaining obligors within the group. A group is defined as two or more obligors that are interrelated in such a way that they are considered as a single risk.
Each group obligor and the group as a whole are analysed on all aspects, from meeting Triodos Bank’s lending criteria to their capacity to repay the loan.
Credit risk investment portfolio
Liquidity not invested in loans to customers is invested in deposits with banks (including central banks) or bonds. Triodos Bank’s policy is to primarily 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), European 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 only occur when in a country no banks meet our minimum sustainability standards. 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 private mortgages
Private mortgages are treated as a sector and form an integral part of the impact strategy of the bank. Interest rate differentiation on the mortgages based on energy labels incentivises lower energy consumption. In general, mortgage products are highly standardised and regulated. This is the case in the three countries we offer this product. The amounts in the portfolio are usually small and the portfolio is often well diversified (e.g. in terms of geography, source of repayment or maturity). This mitigates credit risk to a large degree, which is evidenced by low defaults. Triodos Bank limits the overall exposure to mortgages as a percentage of the balance sheet to have a balanced mix between business loans and mortgages to private individuals.
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 is not entering 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 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.
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, respectively, the amounts committed or guaranteed.
The following table shows the loans and advances to banks at amortised cost, which are all in stage 1.
Loans and advances to banks at amortised cost | 2022 | 2021 |
---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 1 |
Gross amount | 332,500 | 265,820 |
Allowance for expected credit losses | -7 | -24 |
Carrying amount | 332,493 | 265,796 |
Triodos Bank applies ratings to its loans and advances to customers based on its credit risk policy. Within the policy, clients with total business loans above EUR 250 thousand are rated. Clients with retail mortgage loans and total business loans below EUR 250 thousand have no rating appointed. These are represented in the Not rated category. The below table shows the loans and advances to customers within the rating categories.
Loans and advances to customers at amortised cost | 2022 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
Rating 1-9: Normal risk | 4,568,561 | 1,181,486 | - | 5,750,047 |
Rating 10-13: Increased risk | 142 | 189,048 | - | 189,190 |
Rating 14: Default | - | - | 314,121 | 314,121 |
Not rated — business loans | 95,070 | 24,429 | - | 119,499 |
Not rated — mortgages | 4,285,682 | 12,354 | - | 4,298,036 |
Gross amount | 8,949,455 | 1,407,317 | 314,121 | 10,670,893 |
Allowance for expected credit losses | -6,314 | -5,695 | -39,208 | -51,217 |
Carrying amount | 8,943,141 | 1,401,622 | 274,913 | 10,619,676 |
Loans and advances to customers at amortised cost | 2021 | |||
---|---|---|---|---|
Amounts in thousands of EUR | 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 — business loans | 133,571 | 8,945 | - | 142,516 |
Not rated — mortgages | 3,537,624 | 25,778 | - | 3,563,402 |
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 |
The following table sets out information about the overdue status of loans and advances to customers in Stages 1, 2 and 3.
Loans and advances to customers at amortised cost | 2022 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
Current | 8,871,917 | 1,376,413 | - | 10,248,330 |
Overdue < 90 days | 77,538 | 30,904 | - | 108,442 |
Overdue > 90 days | - | - | 314,121 | 314,121 |
Total | 8,949,455 | 1,407,317 | 314,121 | 10,670,893 |
Loans and advances to customers at amortised cost | 2021 | |||
---|---|---|---|---|
Amounts in thousands of EUR | 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 |
All debt securities at amortised cost are within stage 1. The below table sets out the debt securities per rating.
Debt securities at amortised cost | 2022 | 2021 |
---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 1 |
AAA | 656,768 | 34,263 |
AA | 587,417 | 509,173 |
A | 390,156 | 539,528 |
BBB | 55,471 | 400,424 |
Allowance for expected credit losses | -32 | -10 |
Carrying amount | 1,689,780 | 1,483,378 |
The expected credit loss (ECL) of loan commitments is determined based on the business loans and mortgage loans portfolios. The outcome is presented in the table below.
Loan commitments | 2022 | ||
---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Total |
Gross commitment amount (off-balance) | 723,419 | 168,862 | 892,281 |
Allowance for expected credit losses (recognised as provision on balance sheet) | -645 | -531 | -1,176 |
Carrying amount | 722,774 | 168,331 | 891,105 |
Loan commitments | 2021 | ||
---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Total |
Gross commitment amount (off-balance) | 1,065,319 | 77,377 | 1,142,696 |
Allowance for expected credit losses (recognised as provision on balance sheet) | -1,103 | -292 | -1,395 |
Carrying amount | 1,064,216 | 77,085 | 1,141,301 |
All financial guarantee contracts are within stage 1 and stage 2 as shown in the table below.
Financial guarantee contracts | 2022 | 2021 | ||||
---|---|---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Total | Stage 1 | Stage 2 | Total |
Gross carrying amount | 22,044 | 4,946 | 26,990 | 37,712 | - | 37,712 |
Allowance for expected credit losses (recognised as provision on balance sheet) | -41 | -81 | -122 | -21 | - | -21 |
Carrying amount | 22,003 | 4,865 | 26,868 | 37,691 | - | 37,691 |
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 | ||||
---|---|---|---|---|---|
| 2022 | 2021 | Principal type of collateral held | ||
Non-trading derivatives | 100 | 100 | Cash collective | ||
Loans and advances to customers |
|
|
| ||
Mortgage lending | 98 | 98 | Residential property | ||
Business lending | 60 | 63 | 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 (amounts in thousands of EUR) | 2022 | 2021 |
---|---|---|
Less than 65% | 2,833,441 | 1,669,593 |
65-75% | 366,903 | 501,592 |
75-90% | 641,469 | 609,655 |
More than 90% | 605,356 | 840,288 |
Total residential mortgage lending | 4,447,170 | 3,621,128 |
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. 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 reclassification 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. In case the default is cured and the credit rating goes up, the loan can be transferred back to stage 2 or stage 1 after a probation period.
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:
remeasurement in calculated ECL of individual loans which have transferred between stage 1 and stage 2;
changes in forward-looking macro-economic scenarios;
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:
Total expected credit loss allowances | 2022 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
ECL loans and advances to banks at amortised cost | 7 | - | - | 7 |
ECL loans and advances to customers at amortised cost — business loans and current accounts | 5,622 | 5,281 | 38,900 | 49,803 |
ECL loans and advances to customers at amortised cost — mortgages | 692 | 414 | 308 | 1,414 |
ECL debt securities at amortised cost | 32 | - | - | 32 |
ECL financial guarantees | 41 | 80 | - | 121 |
ECL loan commitments issued | 645 | 531 | - | 1,176 |
ECL other assets | 12 | - | 476 | 488 |
Total expected credit loss allowances | 7,051 | 6,306 | 39,684 | 53,041 |
Total expected credit loss allowances | 2021 | |||
---|---|---|---|---|
Amounts in thousands of EUR | 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 |
The table on the next page presents the movements of the ECL allowance. For the movements of the ECL allowances per financial instrument, refer to the relevant notes of each financial instrument.
Expected credit losses | 2022 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
Balance at 1 January | 9,845 | 3,710 | 37,994 | 51,549 |
|
|
|
|
|
Net remeasurement of allowance for expected credit losses | -2,770 | 2,226 | 8,092 | 7,548 |
of which: |
|
|
|
|
- Effect of transition between stages | -1,078 | 2,636 | 510 | 2,068 |
- Macro-economic forward-looking impact | -2,567 | -106 | - | -2,673 |
- Individual loan or advance behaviour | 455 | 113 | 7,582 | 8,150 |
- Update ECL model | 420 | -417 | - | 3 |
|
|
|
|
|
Net portfolio growth | 43 | 438 | - | 481 |
Other transfers | - | - | - | - |
Write-offs | - | - | -6,033 | -6,033 |
Exchange rate differences | -67 | -68 | -369 | -504 |
Balance at 31 December | 7,051 | 6,306 | 39,684 | 53,041 |
Expected credit losses | 2021 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
Balance at 1 January | 9,277 | 10,592 | 34,133 | 54,002 |
|
|
|
|
|
Net remeasurement of allowance for expected credit losses | -868 | -6,803 | 6,025 | -1,646 |
of which: |
|
|
|
|
- Effect of transition between stages | 851 | -266 | 395 | 980 |
- Macro-economic forward-looking impact | -3,942 | -7,221 | - | -11,163 |
- Individual loan or advance behaviour | 1,317 | 1,450 | 5,630 | 8,397 |
- Update ECL model | 906 | -766 | - | 140 |
|
|
|
|
|
Net portfolio growth | 1,342 | -196 | - | 1,146 |
Other transfers | - | - | - | - |
Write-offs | - | - | -2,306 | -2,306 |
Exchange rate differences | 94 | 117 | 142 | 353 |
Balance at 31 December | 9,845 | 3,710 | 37,994 | 51,549 |
Allowance for expected credit losses reconciliation to statement of profit or loss
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.
Impairment result on financial instruments | 2022 | |||
---|---|---|---|---|
Amounts in thousands of EUR | Stage 1 | Stage 2 | Stage 3 | Total |
Loans and advances to banks | -18 | - | - | -18 |
Loans and advances to customers | -2,286 | 2,359 | 8,076 | 8,149 |
Debts securities at amortised cost | 21 | - | - | 21 |
Financial guarantees | 20 | 79 | - | 99 |
Loan commitments issued | -465 | 222 | - | -243 |
Other assets | - | - | 15 | 15 |
Impairment result on financial instruments for the year | -2,728 | 2,660 | 8,091 | 8,023 |
Impairment result on financial instruments | 2021 | |||
---|---|---|---|---|
Amounts in thousands of EUR | 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 result on financial instruments for the year | 475 | -6,999 | 6,024 | -500 |
Triodos Bank has an annual incurred loss rate of 8 bps (2021: 6 bps). 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.
Amounts in thousands of EUR | 2022 | 2021 |
---|---|---|
Credit-impaired loans and advances to customers at 1 January | 36,887 | 33,438 |
Addition | 15,574 | 11,662 |
Write-off | -5,386 | -2,306 |
Release | -7,498 | -6,049 |
Exchange rate differences | -369 | 142 |
Balance sheet value as at 31 December | 39,208 | 36,887 |
Modified financial assets
The following table provides information on financial assets that were modified during the reporting period. The net modification result comprises the modification result minus modification fees or penalty interest received.
Amounts in thousands of EUR | 2022 | 2021 |
---|---|---|
Financial assets modified during the period |
|
|
Amortised cost before modification | 56,110 | 92,441 |
Net modification result | 268 | -27 |
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 deposited with central and commercial banks for payment system purposes increased in 2022 and is expected to increase further with the growth of Triodos Bank.
Collateral needs stemming from FX forwards decreased in 2022 because of EUR/GBP exchange rate developments. At the end of 2022, a total net amount of EUR 6.7 million cash collateral was posted (2021: EUR 13.5 million).
Interest rate swaps are centrally cleared with LCH Clearnet. At the end of 2022, a total net amount of EUR 73 million cash collateral was posted for initial margin requirements. Due to the increase in interest rates in 2022 the variation margin resulted in cash collateral received of EUR 284.9 million at the end of 2022. Both the cash collateral received and placed are part of the clearing agreement.
Debt securities and loans are deposited 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 2022, a collateral value of EUR 2,373 million was deposited with the Dutch Central Bank (2021: EUR 1,749 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, supplemented with the issuance in 2021 of a green subordinated Tier 2 bond, which diversified 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 changes of liquidity shortages during the day.
As a mid-sized European bank with total funds entrusted of EUR 13,816 million per the end of December 2022, 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.
The liquidity portfolio decreased in 2022 due to repayment of our participation in the targeted longer-term refinancing operation (TLTRO) of the euro system. 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. Around forty percent of our liquidity is invested, mainly in bonds and to a small extent in cash loans. The rest is mainly placed 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
In the Three Lines Model, the Treasury department is, as owner of liquidity risk, the first line. Recently, also a second line risk management function has been established for liquidity and market risk.
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 the following committees for managing liquidity risk:
• The Enterprise Risk Committee oversees liquidity risk as a focus area of financial risks.
• 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 the policy exception. 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 liquidity and funding risks and Triodos Bank’s corresponding liquidity levels and the quality of 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 an increase of the retained securitisation transaction of Dutch mortgage loans (Sinopel 2019) in 2022 and mobilised extra 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 ongoing 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 Treasury. Group Modelling and Valuations manages the liquidity stress testing models.
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 uses funds entrusted for lending purposes that have a positive impact on society. Triodos Bank wants to meet its obligations to all clients at all times 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 13,816 million at year-end 2022 of which 76.2% are deposits insured by the deposit guarantee scheme.
In 2022, the undrawn credit lines granted by central banks increased from EUR 224 million ultimo 2021 to EUR 1,527 million ultimo 2022 because of the ending of the participation in the targeted long-term refinancing operation of the euro system in November and an additional amount of Sinopel 2019 Class A notes deposited at DNB. The remaining collateral needs 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 are centrally cleared with LCH Clearnet. At the end of 2022, a total net amount of EUR 73 million cash collateral was posted for initial margin requirements. Due to the increase in interest rates in 2022 the variation margin resulted in cash collateral received of EUR 285 million at the end of 2022. Both the cash collateral received and placed are part of the clearing agreement.
Debt securities (including the Class A notes of Sinopel 2019) 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. In 2022, Triodos Bank repaid the participation in two TLTROs for an amount of EUR 1,550 million, freeing up collateral. Still, in total an amount of EUR 2,373 million was placed as collateral with the Dutch Central Bank at year-end (2021: EUR 1,749 million). This increase is mainly caused by the increase in Class A notes due to the restructuring of the RMBS transaction Sinopel 2019 which took place in November 2022.
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 Model organisational structure, with independent control, compliance, audit and risk management functions, ensures a clear division of tasks, power and responsibility is in place.
Periodically, the Liquidity Contingency Plan is 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 the conservative and robust liquidity management framework it has integrated in its 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 increased levels of interest rates in 2022 have a positive impact on the returns made on the liquidity buffer. This has influenced the trade-off between having sufficient liquidity versus the costs of holding that liquidity. In 2022, the liquidity buffer started to be a contributor to the bank's overall profitability.
Securitisation
In 2022, Triodos increased its retained residential mortgage-backed securities (RMBS) transaction called Sinopel 2019 B.V. (Sinopel) in order to further increase the liquidity contingency potential. 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.; they have reaffirmed their ratings in 2022 for the increase of notes issued under the Sinopel transaction.
As there is no risk transfer with the Sinopel transaction, the securitisation exposures (notes) are not separately risk weighted. 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 Class A notes of the retained securitisation are deposited as collateral with the Dutch central bank. The collateral value of the Class A notes deposited as collateral is EUR 1,346.5 million (2021: EUR 568.8 million) reflecting the restructuring of the Sinopel 2019 transaction in 2022.
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.
2022 | Less than | 1–3 | 3 months | 1–5 years | More than | No maturity | Total | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial asset by type |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents | 2,581,140 | - | - | - | - | - | 2,581,140 | ||||||
Loans and advances to banks | 186,444 | 1,358 | - | - | - | 144,691 | 332,493 | ||||||
Loans and advances to customers | 160,530 | 451,023 | 972,909 | 3,672,590 | 5,362,624 | - | 10,619,676 | ||||||
Debt securities at amortised cost | 75,296 | 55,765 | 286,967 | 1,113,554 | 158,198 | - | 1,689,780 | ||||||
Investment securities | - | - | - | - | - | 45,718 | 45,718 | ||||||
Non-trading derivatives | 430 | 3,709 | 1,399 | 6,527 | 283,631 | - | 295,696 | ||||||
Other assets2 | 23,942 | 7,519 | 10,091 | 3,659 | 10,059 | 180,707 | 235,977 | ||||||
Total assets | 3,027,782 | 519,374 | 1,271,366 | 4,796,330 | 5,814,512 | 371,116 | 15,800,480 | ||||||
|
|
|
|
|
|
|
| ||||||
Financial liability by type |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
| ||||||
Deposits from banks | 284,881 | 80 | - | 29,730 | 22,396 | - | 337,087 | ||||||
Deposits from customers | 13,049,386 | 382,973 | 248,409 | 109,685 | 25,887 | - | 13,816,340 | ||||||
Non-trading derivatives | - | 8 | 1,241 | - | - | - | 1,249 | ||||||
Debt issued and other borrowed funds | - | 5,116 | - | - | 254,768 | - | 259,884 | ||||||
Other liabilities3 | 76,201 | 14,832 | 15,103 | 10,955 | 7,894 | 1,540 | 126,525 | ||||||
Total liabilities | 13,410,468 | 403,009 | 264,753 | 150,370 | 310,945 | 1,540 | 14,541,085 | ||||||
|
|
|
|
|
|
|
| ||||||
Off-balance sheet liabilities by type |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
| ||||||
Contingent liabilities | 4,058 | 160 | 1,549 | 5,866 | 37,439 | - | 49,072 | ||||||
Irrevocable facilities | 99,198 | 55,204 | 233,729 | 630,421 | 834,615 | - | 1,853,167 | ||||||
Total off-balance sheet liabilities | 103,256 | 55,364 | 235,278 | 636,287 | 872,054 | - | 1,902,239 | ||||||
|
2021 | Less than | 1–3 | 3 months | 1–5 years | More than | 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 | - | 1,000 | - | 118,153 | 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 | 4,407,002 | 5,187,685 | 352,476 | 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 | ||||||
|
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
| 2022 | 2021 | |||||||
---|---|---|---|---|---|---|---|---|---|
Amounts in thousands of EUR | Carrying amount | Carrying amount | |||||||
Balances with central banks | 2,581,140 | 4,277,589 | |||||||
Cash and balances with other banks | 332,493 | 265,796 | |||||||
Unencumbered debt securities issued by sovereigns | 1,338,256 | 191,736 | |||||||
Undrawn credit lines granted by central banks1 | 1,527,299 | 223,772 | |||||||
Other assets eligible for use as collateral with central banks | - | - | |||||||
Total liquidity reserves | 5,779,188 | 4,958,893 | |||||||
|
Financial assets available to support future funding
2022 | Pledged as collateral | ||
---|---|---|---|
Amounts in thousands of EUR | Encumbered | Unencumbered | Total |
Cash and cash equivalents | - | 2,581,140 | 2,581,140 |
Loans and advances to banks | 144,691 | 187,802 | 332,493 |
Debt securities at amortised cost | - | 1,689,780 | 1,689,780 |
Loans and advances to customers | - | 10,619,676 | 10,619,676 |
Investment securities | - | 45,718 | 45,718 |
Non-financial assets | - | 531,673 | 531,673 |
Total assets | 144,691 | 15,655,789 | 15,800,480 |
2021 | Pledged as collateral | ||
---|---|---|---|
Amounts in thousands of EUR | 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 |
The decrease in encumbered assets is caused by the repayment of TLTRO III which resulted in releasing debt securities which were held as collateral. In addition, Triodos Bank has an obligation to maintain a reserve with local central banks. As at 31 December 2022, the minimum mandatory reserve deposits with various central banks amount to EUR 124.3 thousand (2021: EUR 115.9 thousand).
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. 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.
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 British pounds.
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 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 profit or loss 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 strategic risks is a renewed period of low interest rates. Although interest rates have increased significantly during 2022, there is a possibility that central banks will have to decrease policy rates in the coming years, with a negative impact on Triodos Bank’s interest margin.
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 CET1 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 change in interest rate environment and the maturity of the portfolio, prepayments decreased during the last year. 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 uses 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 resolve 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 or loss statement. As a consequence, hedge ineffectiveness is automatically reflected in the profit or loss.
Explanation of the significance of the IRRBB measures and significant variations
Economic value of equity at risk (EVE at risk) slightly increased in 2022. The increasing market rates caused a large shift in expected repricing of savings rates, lowering the duration of the savings accounts and increasing the economic value at risk. The growing mortgage portfolio also caused an increase. These effects were partly offset by hedging with interest derivatives. All in all, EVE at risk, as measured under a parallel-up scenario, increased from 7.7% to 9.2%.
Net interest income increased in 2022 due to the rising rate environment. This also led to higher net interest income at risk as the higher income could be lost when rates decrease. The change in net interest income at risk under the parallel-down scenario increased from 1.2% to 10.6%.
Changes in net interest income are measured with the following assumptions:
• The upward and downward scenarios reflect a parallel shock of 200 basis points for EUR and 250 basis points for GBP curves.
• 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 2.1 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 increased from 1.2% to 10.6% in 2022, and two-year net interest income at risk increased from 4.4% to 18.2%. Both indicators show their worst-case outcome in a scenario where interest rates are shocked parallel downwards.
Supervisory outlier test
In 2022, the supervisory outlier test increased from 8.7% to 10.8%. The increase is mainly caused by a shorter duration of the savings accounts and the growing mortgage portfolio, these effects are partly offset by additional hedging using interest rate derivatives. The supervisory outlier test worst-case outcome is measured in the parallel-up scenario where rates increase 200 basis points for the EUR and 250 basis points for GBP.
EVE at risk
EVE at risk increased from 7.7% to 9.2% in 2022. As with the supervisory outlier test, the parallel-up scenario is the worst-case scenario for EVE at risk.
Duration of equity
Duration of equity increased from 3.2 to 5.0 years over the course of 2022. The developments resembled those of EVE at risk since the underlying drivers are similar to those for the supervisory outlier test and EVE at risk, although one difference is that duration of equity is calculated under the assumption of a 100 basis point 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:
2022 | Floating- | <= 3 | <= | <= | > | Total |
---|---|---|---|---|---|---|
Interest-bearing assets |
|
|
|
|
|
|
Cash | 2,580,062 | - | - | - | - | 2,580,062 |
Banks | 315,497 | 1,355 | - | 15,447 | - | 332,299 |
Loans | 1,155,515 | 588,138 | 1,521,685 | 3,115,842 | 4,555,452 | 10,936,632 |
Hedged loans | 20,000 | 629,400 | 727,400 | -81,800 | -1,295,000 | - |
Interest-bearing securities | - | 149,004 | 265,344 | 1,121,756 | 137,309 | 1,673,413 |
Total | 4,071,074 | 1,367,897 | 2,514,429 | 4,171,245 | 3,397,761 | 15,522,406 |
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
Banks | 285,077 | 989 | 3,682 | 33,168 | 14,156 | 337,072 |
Subordinated loans | - | 98 | 295 | 254,375 | - | 254,768 |
Funds entrusted | 25,140 | 1,664,787 | 1,934,151 | 7,056,395 | 3,127,545 | 13,808,018 |
Total | 310,217 | 1,665,874 | 1,938,128 | 7,343,938 | 3,141,701 | 14,399,858 |
2021 | Floating- | <= 3 | <= | <= | > | 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 |
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
Triodos Bank aims to avoid net currency positions, with the possible exception of those arising from strategic investments. The currency risk of the UK subsidiary equity participation was hedged during 2022. The position also contains the currency derivatives of Triodos Investment Funds which are nearly fully hedged.
There is a trade-off between FX-risk-hedging and capital-ratio-hedging. If the FX risk of the participation is hedged, the effect will be that the capital ratio will change as result of FX rate changes. And if the FX risk is not hedged, the effect will be that the value of our capital will change, however the capital ratio will remain stable.
The following table shows Triodos Bank's foreign currency position in thousands of EUR as at 31 December.
2022 | Cash position | Cash position | Term position | Term position | Net position | Net position |
---|---|---|---|---|---|---|
GBP | 2,091,298 | 1,866,187 | - | 222,116 | 2,995 | - |
USD | 17,533 | 718 | 5,605 | 5,605 | 16,815 | - |
NOK | 95 | - | - | - | 95 | - |
AUD | 1 | - | - | - | 1 | - |
SEK | 49 | - | - | - | 49 | - |
INR | - | - | 1,418 | 1,418 | - | - |
Total | 2,108,976 | 1,866,905 | 7,023 | 229,139 | 19,955 | - |
Net open foreign currency position (total of net positions debit and credit): EUR 20.0 million.
2021 | Cash position | Cash position | Term position | Term position | Net position | Net position |
---|---|---|---|---|---|---|
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 21.5 million.