The PD 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 has in
many cases secured additional collateral. This additional collateral 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
2014, the LGD percentage of Rabobank's total Advanced IRB portfolio was 23.2% (21.8%).
Bad debt costs and allowances for loan losses
EDTF 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: Special Accounts, 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 in accordance with the
contractual obligations, this will give rise to an impairment (impaired loan). 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 loansto 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 2014, this involved an amount of EUR 16,122 (16,171) million.
The allowance for loan losses stood at EUR 9,438 (8,710) million, which corresponds to a 59% (54%)
coverage of impaired loans.
Over and above these allowances, additional coverage was raised through collateral and other
securities. Rabobank applies the one-obligor principle, which means that the exposure to the
debtor and all counterparties belonging to the same group is taken into account. In addition,
the full exposure to the client is qualified as impaired, also with respect to the part of the loan
that is not in arrears and/or even if adequate coverage is available for part of the exposure in
the form of collateral. Finally, Rabobank takes allowances within the rules of IFRS. At year-end
2014, impaired loans corresponded to 3.8% (3.7%) of the private sector loan portfolio.
89 Rock-solid bank: risk management
