Credit risk

Credit risk relates primarily to counterparty’s potential inability to meet its obligations towards Triodos Bank and the losses that might be incurred as a result. Credit risk concerns both payment arrears and negative changes due to a counterparties lower credit rating. Credit risk also includes concentration risk in the credit portfolio, which is the risk Triodos Bank faces that large (connected) individual exposures and significant exposures to groups of counterparts whose likelihood of default is driven by common underlying factors, e.g. sector, economy, geographical location and instrument type fail to meet their obligations.

Credit risk relates to all financial assets like loans, deposits with financial institutions and bonds.

Triodos Bank manages credit risk from two perspectives:

  • Primary at the individual level focusing on the direct relation with the counterparty
  • Globally at the portfolio level in order to manage the concentration of risks per sector, country or region;

Loans

Loans are provided to businesses and projects that contribute to achieving Triodos Bank’s mission. Given that this involves a small number of sectors, higher sector concentration is inherent to the loan portfolio. Concentration on the existing sectors is acceptable because Triodos Bank has considerable expertise in these sectors and actively invests in increasing knowledge within the organisation. Risk is also reduced by the spread of the loan portfolio in the different countries and the high quality of securities (collateral) against outstanding loans. Principal collateral are mortgage registrations for business or private properties, securities from public authorities, companies or private individuals, and rights of lien on movables, such as office equipment, inventories, receivables and/or contracts for projects.

Lending is primarily the responsibility of local branches, which maintain close relationship to their customers. Lending decisions are made by local credit committees in each of the branches. Each local credit committee is authorised to make decisions within agreed parameters and limits set by the Executive Board. Based on advice of the Executive Board Credit Committee, the Executive Board decides on loans that exceed these limits.

All business loans in the portfolio are periodically reviewed on an individual basis. The frequency depends on the debtor’s creditworthiness, the degree of market exposure and the market in which the debtor operates.

The credit committee of the branch concerned discusses and, if necessary, takes action with respect to overdue payments from debtors. If there is any doubt regarding the continuity of the debtor’s core operations and/or a debtor fails to settle agreed interest and repayment instalments for a prolonged period, this debtor falls under the category of doubtful debtors and will be managed intensively. Provisions for loan losses are taken for doubtful debtors for the difference between the total amount of the debtor’s outstanding liability to Triodos Bank and the future expected cash flows discounted at the original effective interest rate of the contract. In 2010, the net additions to the provision for doubtful debts, as a percentage of the average loan portfolio, was 0.52% (2009: 0.34%). The total of provisions related to the outstanding credits is 1.0% (2009: 0.6%) as at the end of the year.

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

Governments and Financial institutions

Monies not invested in loans to customers are invested for liquidity purposes in bonds or placed with other banks. Policy is to invest in the country were the money was raised. The Executive Board may deviate from this policy, after consultation with the Asset and Liability Committee. The bond portfolio of Triodos Bank is mainly comprised of government, and government guaranteed bonds. Triodos Bank also invests in a limited number of other types of high grade bonds issued by regional authorities, and financial institutions.

Banks are selected on the basis of their creditworthiness and screened on their sustainability performance by the Triodos Research department. Exceptions can occur, if the number of selected banks in a country is not sufficient to place Triodos Bank’s liquidities. In such cases, deposit notice periods will not exceed three months. All counterparty limits for banks are granted by the Executive Board after advice from them Executive Board Credit Committee. Triodos Bank uses Fitch and/or Moody’s credit rating to assess the counterparty risk related to bonds and financial institutions, if available.

Risk weighted value

An overview of the credit risk position within Triodos Bank, based on risk-weighted assets, off-balance sheet items and derivatives, is given in the following tables which are divided by the following criteria: exposure class, sector and country.

Risk-weighted value per exposure class (asset class)

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2010
Exposure class
Amounts in thousands of EUR

Net exposure
value

Credit risk
mitigation

Fully adjusted
exposure value

Risk-weighted
value

 

 

 

 

 

Central governments and central banks

489,153

184,700

673,853

Regional governments and
local authorities

151,060

18,341

169,401

2,438

Banks

739,319

–28,948

710,371

155,176

Corporates

1,897,790

–142,977

1,754,813

1,373,277

Retail exposures

82,081

–11,883

70,198

43,085

Secured by property

799,488

–5,613

793,875

592,399

Past due items

62,094

–13,620

48,474

62,538

Other items

60,597

60,597

60,597

 

 

 

 

 

 

 

 

 

 

Total

4,281,582

4,281,582

2,289,510

 

 

 

 

 

Whereof:

 

 

 

 

Assets

3,479,364

3,479,364

1,929,175

Off-balance sheet items

778,031

778,031

343,416

Derivatives

24,187

24,187

16,919

 

 

 

 

 

 

 

 

 

 

Total

4,281,582

4,281,582

2,289,510

 

 

 

 

 

  (XLS:) Download XLS

2009
Exposure class
Amounts in thousands of EUR

Net exposure
value

Credit risk
mitigation

Fully adjusted
exposure value

Risk-weighted
value

 

 

 

 

 

Central governments and central banks

408,328

179,976

588,304

Regional governments and
local authorities

56,386

3,568

59,954

81

Banks

805,803

–64,024

741,779

168,453

Corporates

1,304,353

–105,704

1,198,649

1,035,406

Retail exposures

64,776

–7,609

57,167

34,777

Secured by property

651,064

–4,067

646,997

477,518

Past due items

24,671

–1,794

22,877

31,107

Other items

47,725

–346

47,379

47,379

 

 

 

 

 

 

 

 

 

 

Total

3,363,106

3,363,106

1,794,721

 

 

 

 

 

Whereof:

 

 

 

 

Assets

2,970,816

2,970,816

1,608,853

Off-balance sheet items

375,376

375,376

175,934

Derivatives

16,914

16,914

9,934

 

 

 

 

 

 

 

 

 

 

Total

3,363,106

3,363,106

1,794,721

 

 

 

 

 

The net exposure value is a sum of:

  • Assets excluding intangible assets, excluding discount of subordinated liabilities (included under prepayments and accrued income) and after deducting discount of bonds (included under accruals and deferred income);
  • Off-balance sheet items, consisting of contingent liabilities and irrevocable facilities;
  • Derivatives, valued at the credit risk equivalent, which is based on the additional costs or the lost revenues of a substitute transaction in the event that the counterparty does not fulfil its obligations.

Credit risk mitigation relates to received collaterals (guarantees and pledged funds entrusted). As a result, the credit risk shifts from the exposure class of the direct counterparty to the exposure class of the collateral provider. This results in the fully adjusted exposure value for each exposure class.

The risk-weighted value is calculated by multiplying the fully adjusted exposure value with the risk weight and the conversion factor. Basel II guidelines state the definition of the exposure classes, the risk weights and conversion factors.

Risk weights depend on the exposure class and the credit rating of the direct counterparty or the collateral provider. The risk weights per exposure class used by Triodos Bank are:

  • Central governments and central banks: 0%;
  • Regional governments and local authorities: 0% for Dutch governments, 20% for foreign governments; the percentage depends on national legislation;
  • Public sector entities: 100%;
  • Banks: 0% for exposures secured by pledged funds entrusted of Triodos Bank; 20% or 50% for exposures of or guaranteed by other banks, depending on the original term to maturity of the exposure;
  • Corporates: 100%;
  • Retail exposures: 75% or 100%;
  • Secured by property: 35% for exposures secured by residential property, 50% or 100% for exposures secured by non residential property;
  • Past due items: 50% or 100% for exposures secured by residential property; 100% or 150% for other exposures; the percentage depends on the amount of bad debt provisions that have been formed;
  • Other items (participating interests, property and equipment and other assets without counterparties): 100%.

Conversion factors only apply to off-balance sheet items. The conversion factors used by Triodos Bank are:

  • Contingent liabilities: 0.5 or 1.0, depending on the nature of the issued guarantee;
  • Irrevocable facilities: 0.2 or 0.5, depending on the original term to maturity of the credit facility.

Risk-weighted value per sector

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Sector

2010

 

2009

 

Amounts in thousands of EUR

Risk-weighted value

%

Risk-weighted value

%

 

 

 

 

 

Banks and financial intermediation

206,125

9

192,257

11

Basic materials

13,222

1

6,125

Construction and infrastructure

708

675

Consumer products (non-food)

6,475

4,876

Retail

22,262

1

21,779

1

Services

272,616

12

206,232

12

Healthcare and social work

247,724

11

178,514

10

Agriculture and fishing

100,730

4

82,740

5

Media

5,593

6,659

Utilities

738,855

32

603,448

34

Private individuals

62,984

3

40,632

2

Leisure and tourism

80,413

4

59,196

3

Transport and logistics

10,254

7,185

Real estate

196,011

9

105,053

6

Insurance and pension funds

501

501

Food and beverages

52,842

2

49,830

3

Other sectors

272,195

12

229,019

13

 

 

 

 

 

 

 

 

 

 

Total

2,289,510

100

1,794,721

100

 

 

 

 

 

The sectors are defined in the Basel II guidelines. Risk-weighted value is attributed to the sector of the direct counterparty.

Risk-weighted value per country

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Country

2010

 

2009

 

Amounts in thousands of EUR

Risk-weighted value

%

Risk-weighted value

%

 

 

 

 

 

Belgium

494,000

22

351,470

20

Denmark

6,253

8,394

France

56,280

2

41,836

2

Germany

85,645

4

46,131

3

Ireland

26,591

1

8,866

Italy

3,492

3,494

Luxembourg

4,420

85

The Netherlands

735,206

32

627,096

35

Norway

82

Spain

473,025

21

387,677

22

United Kingdom

403,032

18

318,183

18

United States

1,484

1,489

 

 

 

 

 

 

 

 

 

 

Total

2,289,510

100

1,794,721

100

 

 

 

 

 

Risk-weighted value is attributed to the country of the direct counterparty.

Maturity per exposure class (asset class)

The following tables provide an overview of the remaining maturity of the assets per exposure class. The payable on demand and indefinite maturities include accrued interest and fees, doubtful debt provisions and balance sheet items with no or unknown maturity.

  (XLS:) Download XLS

2010
Amounts in
thousands of EUR

Payable on
demand
and
indefinite

2 days or
more and
shorter than
3 months

More than
3 months
and shorter
than 1 year

More than
1 year and
shorter than
5 years

More than
5 years

Total
assets

 

 

 

 

 

 

 

Central governments and central banks

56,922

15,020

38,302

230,733

148,002

488,979

Regional goverments and local authorities

1,073

75,000

50,987

24,000

151,060

Banks

376,799

227,923

34,222

88,963

2,000

729,907

Corporates

62,555

17,148

121,799

360,171

626,949

1,188,622

Retail exposures

6,138

287

2,212

8,194

31,903

48,734

Secured by property

19,637

10,312

28,590

136,362

554,470

749,371

Past due items

33,788

815

1,070

9,799

16,622

62,094

Other items

60,597

60,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

617,509

271,505

301,195

885,209

1,403,946

3,479,364

 

 

 

 

 

 

 

  (XLS:) Download XLS

2009
Amounts in
thousands of EUR

Payable on
demand
and
indefinite

2 days or
more and
shorter than
3 months

More than
3 months
and shorter
than 1 year

More than
1 year and
shorter than
5 years

More than
5 years

Total
assets

 

 

 

 

 

 

 

Central governments and central banks

61,689

9,967

51,548

164,830

120,220

408,254

Regional goverments and local authorities

405

20,000

27,981

8,000

56,386

Banks

314,637

245,632

107,271

128,539

1,000

797,079

Corporates

52,256

25,447

78,935

335,934

492,723

985,295

Retail exposures

6,388

791

2,561

7,290

21,918

38,948

Secured by property

28,237

6,224

17,086

96,284

464,627

612,458

Past due items

10,916

411

516

2,229

10,599

24,671

Other items

47,725

47,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

522,253

288,472

277,917

763,087

1,119,087

2,970,816

 

 

 

 

 

 

 

Bad debts and overdue receivables

The following tables provide an overview of the bad debts and overdue receivables per sector and country.

Bad debts are loans we expect will not be fully repaid in accordance with the original loan contract. Provisions for loan losses are taken for bad debts for the difference between the future expected cash flows discounted at the original effective interest rate of the contract and the total amount of the debtor’s outstanding liability to Triodos Bank. Overdue receivables are loans overdue for more than 90 days.

Bad debts and overdue receivables per sector

  (XLS:) Download XLS

Amounts in
thousands of EUR

Bad debts at year end

Provision for bad debts
at year end

Value adjustments
in the year

Overdue receivables
(excl. bad debts) at year end

 

2010

2009

2010

2009

2010

2009

2010

2009

 

 

 

 

 

 

 

 

 

Basic materials

2,205

1,814

1,540

219

1,321

49

461

Construction and infrastructure

35

33

23

26

–6

–62

56

Consumer products
(non-food)

1

48

11

Retail

825

746

518

475

69

93

105

Services

2,256

1,386

1,227

843

377

–55

3,348

1,423

Healthcare and social work

1,423

2,595

470

354

110

153

5,509

2,309

Agriculture and fishing

17,994

4,690

3,678

1,679

1,900

608

5,941

3,454

Media

111

59

82

33

46

19

41

242

Utilities

21,037

17,580

9,059

4,159

4,638

2,958

3,406

790

Private individuals

548

693

Leisure and tourism

9,569

3,401

1,493

725

680

482

7,065

4,701

Transport & logistics

56

64

45

45

–10

62

Real estate

1,845

46

47

–1

7,502

3

Food and beverages

819

368

383

373

72

46

2,752

3,499

Other sectors

4,956

4,299

2,060

1,461

589

792

3,920

1,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

63,131

37,035

20,624

10,392

9,843

4,980

40,229

19,362

 

 

 

 

 

 

 

 

 

Bad debts and overdue receivables per country

  (XLS:) Download XLS

Amounts in
thousands of EUR

Bad debts at year end

Provision for bad debts
at year end

Value adjustments
in the year

Overdue receivables
(excl. bad debts) at year end

 

2010

2009

2010

2009

2010

2009

2010

2009

 

 

 

 

 

 

 

 

 

Belgium

11,488

8,555

6,834

2,035

4,789

1,255

3,384

867

France

81

27

Germany

2,947

3,105

400

495

5

476

12,295

Ireland

1,275

706

200

489

–14

1,596

527

The Netherlands

35,710

16,994

8,953

5,631

2,966

2,221

5,824

3,746

Spain

6,235

5,544

2,118

705

1,339

401

13,938

10,232

United Kingdom

5,476

2,837

1,613

1,326

255

641

3,111

3,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

63,131

37,035

20,624

10,392

9,843

4,980

40,229

19,362

 

 

 

 

 

 

 

 

 

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