assessing credit risk of countries and financial … 03_simona_cioffi.pdf · risk countries (aaa to...

BANK CREDIT DEPARTMENT

Simona Cioffi

ASSESSING CREDIT RISK OF COUNTRIES

AND FINANCIAL INSTITUTIONS

Brescia, May 27th 2014

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Bank Credit Department

Summary

Introduction to Bank Credit Department

Risk from Pillar I: Credit risk

Standardised Approach

Country analysis

Bank analysis

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credit analysis of countries;

credit analysis of domestic and international financial institutions using

standardised approach;

providing trade finance solution (L/Cs with postfinancing/deferred payment;

bank guarantees; stand by L/Cs; ECA backed transaction; credit insurance)

for all UBI Group’s legal entities in order to promote international trade;

Suggesting a price range for all trade finance business (confirmed L/Cs; L/Cs

with postfinancing/deferred payment; bank guarantees; stand-by L/Cs; ECA

backed transaction);

issuing of foreign guarantees;

relationship with ECA’s (Export Credit Agencies) such as SACE and EBRD,

IFC, etc.

Bank Credit Department – Mission -

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LOANS

LETTERS OF CREDIT

SYNDICATED LOANS

FINANCIAL GUARANTEES

DERIVATIVES TRADE

MONEY MARKET OPERATIONS

FOREX EXCHANGE

Credit risk - transactions involved

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• CREDIT RISK POLICY (POLICY RISCHI CREDITIZI)

• COUNTRY AND COUNTERPARTY CREDIT RISK REGULATION (REGOLAMENTO RISCHIO CONTROPARTI ISTITUZIONALI E PAESE)

• CREDIT FACILITIES TO CAP MAXIMUM EXPOSURE TO REACH

Credit risk - rules

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PILLAR I RISKS as follows:

CREDIT RISK the risk of incurring losses resulting from the default of a

counterparty. This also comprises counterparty risk in the definition; it is the

risk that a counterparty defaults before the transaction itself is settled;

MARKET RISK risk of changes in the market value of financial instruments

held, due to unexpected changes in market conditions and/or in the credit

rating of the issuer

OPERATIONAL RISK the risk of incurring losses resulting from the inefficiency

or procedures failure, human error, business disruption, system failure and

so on

Credit risk - definition

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is the risk of loss arising from the inability or failure of an obligor (borrower or counterparty) to meet its obligations.

CREDIT RISK

Risk arising from the creditworthiness of trading partners

COUNTERPARTY RISK

Credit risk – UBI characteristic risk

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There are three broad approaches to credit risk (1) (Basel II) :

1. Standardised approach;

2. Bank’s internal rating systems (IRB);

3. Advanced bank’s internal rating systems (A-IRB)

(1) (the standardized approach to credit risk, Basel Committee on banking supervision (january 2001)

UBI GROUP APPLIES: BORROWER

STANDARDISED

APPROACH SOVEREIGN INSTITUTIONAL

BANK’S INTERNAL RATING

SYSTEM

ADVANCED INTERNAL

RATING SYSTEM

CORPORATE (2012.06.16

provision n.423940)

RETAIL

(2013.07.19 provision

n.689988)

Credit risk - analyses

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• Long-term Issuer Default Rating

• The ability to meet financial commitments in the long-term, independently of the maturity of individual obligations. This rating is an indicator of the probability that an issuer will default.

• AAA: best rating – D: default

FITCH

• Long-term debt and deposit rating

• The ability to repay long-term debt (maturing in or after one year) in local currency.

• (Aaa: best rating – C: default)

Moody’s

• Long-term Counterparty Credit Rating

• The issuer credit rating reflects the agency’s opinion of the intrinsic creditworthiness of the bank combined with an assessment of the potential for future support that the bank might receive in the event of default .

• (AAA: best rating – D: default

Standard and

Poor’s

External Credit Assessment Institutions

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…

FITCH LONG TERM

ISSUER DEFAULT RATING

MOODY’S LONG TERM

DEPOSIT RATING

STANDARD AND POOR’S LONG TERM COUNTERPARTY CREDIT

RATING

RISK COUNTRIES

LOW RISK BBB- <SOVEREIGN

RATING< A

MEDIUM RISK BB- <SOVEREIGN

RATING< BB+

HIGH RISK UNRATED

<SOVEREIGN RATING< BB-

NO RISK COUNTRIES

= OECD belonging

Countries - categories

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SOVEREIGN RISK

COUNTRY RISK

COUNTRY RISK

covers the downside

of a country’s

Business environment

including legal

environment, levels of

corruption, and

socioeconomic

variables such as

income disparity

SOVEREIGN RISK

COUNTRY RISK

SOVEREIGN

RISK

capture the risk

of a country

defaulting on its

debt obligations

Sovereign risk - country risk

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general legislation;

business legal environment;

corruption;

political stability;

good government;

regulation;

size and potential of domestic market;

education, literacy rates and technological sophistication

Country risk – key factors

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CORRUPTION PERCEPTION INDEX – CPI – cpi.transparency.org

GLOBAL COMPETITIVENESS INDEX - GCI -

www.weforum.org/reports/global-competitivenes

DOING BUSINESS RANKINGS www.doingbusiness.org

UNITED NATION HUMAN DEVELOPMENT INDEX - HDI - hdr.undp.org

WORLD BANK POLITICAL RISK INDICATOR

Country risk – major indices widely available

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SOVEREING RISK

COUNTRY RISK

Country limits are set in order to constrain the risks potentially arising from country-specific or region specific event.

Country risk - exposure

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INVESTMENT GRADE COUNTERPARTY / NON INVESTMENT GRADE COUNTERPARTY

FITCH LONG TERM ISSUER

DEFAULT RATING

MOODY’S LONG

DEPOSIT RATING

STANDARD AND POOR’S

COUNTERPARTY CREDIT

RATING

LONG TERM FOREIGN

CURRENCY ISSUER

DEFAULT RATING

High Investment grade in no

risk countries (AAA to A-)

Investment grade in no

risk countries (BBB+ to

BBB-)

Non investment grade in no

risk countries (BBB- to unrated)

Investment grade in risk

countries (BBB to BBB-

)

Non Investment

grade in risk countries (BBB+ to

BBB-)

Non Investment

grade in risk countries

(BB+ to B-)

Case by case assessment

Counterparty risk - categories

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Counterparty risk – financial counterparties

BANKS AND BANKING GROUPS –

Institution licensed as a receiver of deposits and a lender of loans

SECURITIES FIRMS AND GROUPS HEADED BY A SECURITIES FIRM

ASSET MANAGEMENT COMPANIES AND SICAVS

FINANCIAL INTERMEDIARIES REFERRED TO IN ARTICLE 107 OF THE CONSOLIDATED LAW ON BANKING

ELECTRONIC MONEY INSTITUTIONS - EMIS

PAYMENT INSTITUTIONS

FINANCIAL CONGLOMERATES

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Counterparty risk – bank balance sheet – income statement

100 100

less LOAN LOSSES RESERVE 50

INTEREST

BEARING

LIABILITIES

SECURITIES BORROWING

OTHER

ASSET

EARNING

ASSETS

350

CUSTOMER DEPOSITS TOTAL GROSS LOANS CUSTOMERS500

BANK ASSETS BANK LIABILITIES

100 EQUITY

400

350

150

CASH DUE TO BANKS

L

IQ

UID

IT

Y

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• First part of the two-tier risk based capital standard commonly used by regulatory agencies to assess a financial institution's capital adequacy.

• TIER 1 CAPITAL / TOTAL RISK-WEIGHTED ASSETS

TIER 1 RATIO

•a loan is non performing when payment of interest and principal are PAST DUE by 90 days or more

•NON PERFORMING LOANS / TOTAL LOANS

NPL ratio

•A decrease basically means banks were provisioning less for their bad debt.

• IMPAIRMENT ON LOANS / OUTSTANDING OR GROSS NON-PERFORMING LOANS

NPL coverage

ratio

• Indicates the percentage of a bank's loans funded through deposits

•Maximum 80% to 90% (the higher the ratio the more the institution is relying on borrowed funds)

•LOANS (GROSS) / TOTAL DEPOSITS

LOAN/DEPOSIT

RATIO

•Indicates how well management employed the earning asset base

•Net Interest Income (annualized) / Average Interest Earning Assets

NET INTEREST MARGIN

•it gives you the revenues split, how much revenues comes from the net interest income and how much derived from fees and trading gain

NET INTEREST INCOME

TO REVENUES

•Efficiency improves as the ratio decreases TOTAL NON-INTEREST EXPENSES / TOTAL NET INCOME

COST/INCOME RATIO

•it measures the proportion of a bank's total loans that have been lost due to NPL

•NET CHANGES IN IMPAIRMENT FOR CREDIT RISKS / AVERAGE OUTSTANDING LOAN PORTFOLIO

COST OF RISK

Counterparty risk – ratios analyses

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