Lending and bad debt expenses
Country risk
will be made with the client. Guidance is given by a special
unit within Rabobank Group particularly in case of larger
and more complex loans with a going-concern threat. If it
is likely that the debtor is unable to fulfill all contractual
obligations, this is a matter of impairment and an allowance
is made which is charged to income if and to the extent
that the exposure vis-a-vis the client exceeds the discounted
value of future cash flows to be received. These loans, for
which an allowance has been taken, are impaired loans and
amounted to EUR 4,355 (4,814) million at 31 December 2006.
The allowance for credit losses at 31 December 2006 was
EUR 2,333 (2,438) million, corresponding to 54% (50%)
coverage. It is to be noted that Rabobank Group identifies
impairments at an early stage and applies the "one obligor
principle" meaning that the exposure of all counterparties
belonging to the same group is taken into account.
In addition, the full exposure vis-a-vis the client is regarded
as impaired, even if full coverage is available in the form of,
for example, collateral. At 31 December 2006, impaired
loans as a percentage of private sector lending amounted
to 1.3% (1.7%).
Strong economic growth, in the Netherlands as well as
abroad, resulted in a significant increase in lending by
Rabobank Group to numerous industry sectors in 2006.
Private sector lending increased by 17% to EUR 324 (278)
billion, partly as a result of the fast-growing economy.
The risk profile of Rabobank Group's loan portfolio continued
to be favourable in 2006. This is reflected in bad debt
expenses of only 15 (20) basis points of average private
sector lending in 2006, which is considerably lower than the
5-year average of 22 basis points for the period 2001-2005.
In 2006, Rabobank Group's bad debt expenses, expressed
in basis points, reached their lowest level in 25 years.
For domestic retail banking, bad debt expenses decreased
further to 7 basis points. More than 70% of the domestic
retail banking loan portfolio comprises financing to private
individuals, mainly on the basis of residential mortgages,
which historically have very limited credit losses. In addition,
the development of the domestic economy in 2006 was
favourable to practically all industry sectors, causing bad
debt expenses to decline further. Likewise, favourable
global economic developments caused lower bad debt
expenses for wholesale banking and international retail
banking as well as leasing.
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.
Impaired loans and allowances (in EUR millions)
2006
2005
Impaired
loans
Allowances Coverage
Impaired
loans
Allowances Coverage
Domestic retail banking
2,617
1,228 47%
2,706
1,204 44%
Wholesale banking and
international retail banking
1,455
846 58%
1,843
978 53%
Leasing
281
233 83%
242
193 80%
Other
2
26
23
63
Rabobank Group 4,355 2,333 54% 4,814 2,438 51%
Risk management 73
