Country risk
Distribution of Rabobank Risk Rating
57 Rabobank Group Annual Report 2005
Organisation and risk management: risk management
At 31 December 2005, the provision for loan losses was EUR 2,438 (2,103)
million, corresponding to 51% (52%) coverage. At 31 December 2005,
impaired loans amounted to EUR 4,814 (4,079) million. At 31 December
2005, impaired loans as a percentage of private lending amounted to
1.7% (1.6%).
Present calculations indicate that 48% of Rabobank Group's total
economic capital is required for credit risk. It is self-evident that this
should represent the greater part of economic capital, since lending is
Rabobank's main activity.
Domestic retail banking accounts for 42% of total economic capital
required for credit risk, wholesale banking accounts for 47% and partici
pating interests accounts for 11%. The various diversification effects
have been taken into account in determining this level. Differences in
the product range, such as mortgages, leasing and consumer credits, all
play a role. Also important is the fact that the loan portfolio is widely
spread across different client groups, such as private individuals, small
and medium-sized enterprises as well as multinationals.
RAROC plays an increasingly important part in the financing approval
process. Tools for calculating RAROC for each individual loan are now
being widely used. This supports a proper assessment of risk versus return.
The development in bad debt expenses can be expressed in basis
points of average private lending. At Group level, the average for the
period 2000 to 2004 was 24 basis points. This is on the basis of Dutch
financial reporting standards as applicable through 2004. International
Financial Reporting Standards (IFRS) are applied as from 2005. The bad
debt expenses were extremely low for wholesale banking and inter
national retail banking operations in 2004. For 2005, they are more in
line with the longer-term historical average. The domestic retail banking
operations and leasing both showed a limited decline in the bad debt
expenses. Overall, the bad debt expenses for 2005 were 20 basis points
of average lending, reflecting the continued favourable risk profile of
Rabobank Group's loans portfolio.
With respect to country risk, a distinction is made between transfer risk
and collective debtor risk. Transfer risk relates to the possibility of foreign
governments placing restrictions on funds transfers from debtors in that
country to creditors abroad. Collective debtor risk relates to the situation
in which a large number of debtors in a country cannot meet their
commitments for the same reason (e.g. war, political and social unrest,
natural disasters, but also government policy that does not succeed in
creating macro-economic and financial stability). Rabobank Group uses
a country limit system to manage the transfer risk and to monitor the
collective debtor risk for all countries. After careful review, relevant
countries get an internal country risk rating, after which transfer limits
and a general indicator are established.
Private sector lending by sector at year-end 2005
Private individuals 53%
Trade, industry
and services 30%
Food agribusiness 17%
Rating
PD (basis points)
Description
Loans in of total
2005
R0
0 - 0
No risk
0
R1
0 - 1.6
Exceptionally strong
4
R2 - R4
1.6 - 4.5
Very strong
5
R5 - R7
4.5 - 12
Strong
12
R8 - R10
12 - 40
Adequate
25
R11 - R14
40 - 210
Acceptable
40
R15 - R19
210 - 1,600
Vulnerable
commitments are
being met
10
R20
1,600 - 10,000
Very weak
1
D1 - D4
10,000
Impaired loan
commitments are
not being met
3
Total
100
