EAD is the best estimate of the extent to which a bank may be exposed in the event and at the
time of a counterparty's default. At year-end 2013, the EAD of Rabobank Group's total Advanced
IRB loan portfolio was EUR 574 (606) billion. This EAD includes the expected future usage of
unused credit lines.
At year-end 2013, the EAD weighted average PD of Rabobank Group's total performing
Advanced IRB loan portfolio stood at 1.12% (1.03%). The slight deterioration in the PD was
caused by a change in the PD of existing debtors as well as by changes in the composition
of the portfolio (inflow and outflow of clients), the implementation of new models and
policy changes.
It should be noted that this PD only reflects the extent to which clients are expected to be able
to meet their obligations. The PD does not provide any indication as to the potential losses,
because Rabobank Group has in many cases secured additional collateral.This is reflected in
the LGD, which also takes the possibility of restructuring into consideration. The LGD is the
estimated economic loss that will result if the debtor defaults, expressed as a percentage of the
EAD. At year-end 2013, the LGD percentage of Rabobank Group's total Advanced IRB portfolio
was 21.8% (21.8%).
Impaired loans and allowance for loan losses
EDTF recommendation 28 Once a loan has been granted, ongoing credit management takes place, as part of which
new information (financial and non-financial) is assessed. The bank ascertains whether the
client is fulfilling all its obligations and whether it can be expected to continue to do so in
future. If this is expected not to be the case, credit management is stepped up, monitoring
becomes more frequent, and a closer eye is kept on credit terms. Guidance is provided by a
special department within Rabobank Group, particularly in the case of larger, more complex
loans granted to businesses whose ability to continue as a going concern is at stake. If it is likely
that a debtor will be unable to pay the amounts owed to Rabobank Group in accordance with
the contractual obligations, this will give rise to an impairment. If necessary, an allowance is
formed that is charged to income. The allowance for loan losses consists of three components,
as described below:
The specific allowance is determined on an individual basis for impaired corporate loans
representing significant sums. This allowance is equal to the exposure to the client less the
discounted value of future cash inflows;
The collective allowance is determined for impaired loans which individually are not significant,
i.e. primarily loans to private individuals and small businesses.The allowance is set at portfolio
level, using IFRS-adjusted Basel II parameters;
The general allowance is determined for the portion of the portfolio that is actually impaired
at the balance sheet date but has not yet been identified as such (IBNR: incurred but not
reported). In this case, too, IFRS-adjusted Basel II parameters are used to determine the
amount of the allowance.
Any loans, amounts due from banks and credit-related obligations that have been provided for
qualify as impaired. At year-end 2013, this involved an amount of EUR 12,809 (11,203) million.
The allowance for loan losses stood at EUR 4,306 (3,842) million, which corresponds to a 34%
(34%) coverage of impaired loans. It should be noted that for several years now, the allowance
for portfolios to which a very low probability of recovery is assigned has been written off at
group level. Accordingly, impaired loans are also reduced by that same amount. Excluding this
write-off of EUR 4,405 (3,940) million the coverage ratio was 51
70 Annual Report 2013 Rabobank Group
