RAROC: 14%
Credit risk
56 Rabobank Group Annual Report 2005
Organisation and risk management: risk management
The RAROC (Risk Adjusted Return on Capital) is calculated by relating
the profit realised on a particular activity to the capital required for that
activity. RAROC (after tax) realised by Rabobank Group in 2005 was 14%.
In 2004, RAROC (after tax) was 14%.
Rabobank's policy for accepting new clients is based on careful assess
ment. Rabobank grants loans only if it expects that a client will fully
meet its payment commitments. Approval of larger financing applicati
ons is decided on by committees. A structure consisting of various com
mittee levels has been established, with the amount of the requested
financing as a determining factor for the committee level. The Executive
Board itself decides on the largest financing applications.
Once a loan has been granted, the bank monitors the extent to which
the client meets his commitments. Loans provided to corporate clients,
are being reviewed periodically by reference to new information to
underpin the expectation that the client will continue to be able to meet
its commitments. If commitments are not met, or if there are doubts as
to whether the client will meet his commitments, monitoring is given
a more permanent character. In most cases, the bank and the client
together will search extensively for possible solutions to the problems
that have arisen. In those circumstances, too, the bank continues to
demonstrate its commitment to the client and will widely deploy its
expertise in order to come to a solution that is satisfactory to both the
client and the bank.
A significant part of Rabobank's portfolio consists of mortgage loans
granted to private individuals, where the risk of losses is historically very
low. At 31 December 2005, Rabobank's private sector lending amounted
to EUR 278.1 billion, EUR 146.5 billion or 53% of which consisted of
financing to private individuals. Lending to corporate clients amounted
to EUR 131.6 billion at year-end 2005 and is spread across a large num
ber of sectors.
The loan portfolio is spread not only across numerous sectors but also
across numerous clients in a large number of countries. This creates a
strong and balanced spreading of risks, ensuring that the quality of the
financing portfolio does not significantly deteriorate if one or more
business sectors encounter difficulties or an economic slowdown occurs.
In its financing approval process Rabobank Group uses the Rabobank
Risk Rating, which reflects the counterparty's probability or default (PD)
over a one-year period. This system comprises 25 ratings.
The accompanying table shows the loans as distributed across the
Rabobank Risk Rating. They concern loans to the larger small- and
medium sized entities, with an annual turnover exceeding EUR 10
million, large corporates, the public sector and financial institutions.
As the table illustrates, the centre of gravity in terms of the distribution
of loans across the Rabobank Risk Rating is in the category R11-R14.
This produces a loans-weighted average PD of 1.04%. For 3% of this
portfolio, the commitments are not being fully met and an adequate
provision has been taken for this part of the portfolio. It should be
noted that the data in this table indicate only the extent to which
Rabobank expects that clients can or cannot meet their commitments.
In many cases, the bank has obtained adequate collateral that can be
enforced if clients would no longer meet their commitments, ensuring
that the loan is eventually fully or partly repaid. It can be concluded that
Rabobank Group has a healthy loan portfolio.
As soon as ongoing monitoring or periodic reviews indicate a going-
concern threat to the business financed, an assessment is made
whether the client can be expected to continue meeting its payment
commitments according to the arrangement made and without doing
so from the proceeds from collateral provided. An adequate provision is
made if it is concluded that complete fulfilment is unlikely, but also if
the arrears exceed 90 days or if a bankruptcy petition has been filed or a
moratorium has been granted. This causes the loan to be written down
to the discounted realisable value of the available collateral and of any
other possibilities for recovery. These loans, for which a provision has
been taken, are impaired loans.
Breakdown of economic capital by risk at year-end 2005
Breakdown of economic capital by business units at year-end 2005
Domestic retail banking
Wholesale banking and
international retail banking
Participating interests
Credit risk
Interest rate risk and
market risk
Business risk
Operational risk
Insurance risk
Country risk
