Volume 2 - IFC

CHAPTER MANAGEMENT’S FOUR: SIGNIFICANT DISCUSSION AND IMPACT ANALYSIS
— V. BY ENTERPRISE REGION RISK MANAGEMENT
IFC does not recognize income on loans where collectibility is in doubt
or payments of interest or principal are past due more than 60 days
unless management anticipates that collection of interest is expected in
the near future.
The amount of nonaccruing loans as a percentage of the disbursed
loan portfolio 4 , a key indicator of loan portfolio performance,
increased to 2.7% at June 30, 2009 (2.4% at June 30, 2008). The principal
amount outstanding on nonaccrual loans totaled $457 million at
June 30, 2009, an increase of $88 million (24%) from the June 30, 2008,
level of $369 million.
Total reserves against losses on loans at June 30, 2009, increased to
$1,238 million ($848 million at June 30, 2008), driven by an increase in
general loan loss reserves and specific loan loss reserves due to the deteriorating
credit environment in FY09. This is equivalent to 7.4% of the
disbursed loan portfolio as compared with 5.5% at June 30, 2008.
The five-year trend of nonaccruing loans is presented below:
Percentage
FY05
FY06
FY07
FY08
FY09
$ Millions
NON-ACCRUING LOANS
0 1 2 3 4 5 6 7
0 100 200 300 400 500 600 700
Millions of dollars
Percentage of disbursed loans
IFC operates under the assumption that the guarantee portfolio is
exposed to the same idiosyncratic and systematic risks as IFC’s loan
portfolio and the inherent, probable losses in the guarantee portfolio
need to be covered by an allowance for loss. The allowance at June 30,
2009, was $14 million ($17 million at June 30, 2008), based on the
year-end port folio, and is included in payables and other liabilities on
IFC’s consolidated balance sheet. The decrease in allowance for the
year, $3 million for FY09 ($1 million increase for FY08), is included in
the (provision) release of provision for losses on loans and guarantees
in the consolidated income statement.
During FY09, IFC has suffered $3 million worth of losses due to
rehedging costs related to terminating existing swap exposures.
FINANCIAL RISK
IFC defines financial risk in three components: (a) the potential inability
to realize asset values in its portfolio sufficient to meet obligations to
disburse funds as they arise (liquidity risk); (b) the potential inability
to access funding at reasonable cost (funding risk); and (c) a deterioration
in values of financial instruments or positions due to changes in market
variables such as interest and exchange rates and the volatility thereof
(market risk).
KEY FINANCIAL POLICIES AND GUIDELINES
IFC operates under a number of key financial policies and guidelines as
detailed below, which have been approved by its Board of Directors:
1. Disbursed equity plus quasi-equity investments (net of impairment
write-downs) may not exceed 100% of net worth.
2. Minimum liquidity (liquid assets plus undrawn borrowing commitments
from IBRD) must be sufficient at all times to cover at least 45%
of IFC’s estimated net cash requirements for the next three years.
3. Loans are funded with liabilities having the same characteristics in
terms of interest rate basis and currency and, for fixed rate loans,
duration except for Board-approved new products involving assetliability
mismatches. IFC maintains a minimum level of liquidity, consisting
of proceeds from external funding, that covers at least 65% of
the sum of: (i) 100% of committed but undisbursed straight senior
loans; (ii) 30% of committed guarantees; and (iii) 30% of committed
client risk management products.
4. IFC is required to maintain a minimum level of total resources (including
paid-in capital, total loss reserves and retained earnings, net of
designations) equal to total potential losses for all on- and off-balance
sheet exposures estimated at levels consistent with the maintenance
of a AAA rating.
In addition, under IFC’s Articles of Agreement, as long as IFC has outstanding
borrowings from IBRD, IFC’s leverage, as measured by the ratio
of IFC’s outstanding debt (borrowings plus outstanding guarantees) to
IFC’s net worth (using subscribed capital), may not exceed 4.0 to 1.
LIQUIDITY RISK
The primary instruments for maintaining sufficient liquidity are IFC’s liquid
asset portfolios, including the P6 portfolio:
■ P0, which is generally invested in short-dated deposits, money market
funds, fixed certificates of deposits, one-month floater securities and
repos, reflecting its use for short-term funding requirements.
■ P1, which is generally invested in: (a) high quality foreign sovereign,
sovereign-guaranteed and supranational fixed income instruments;
(b) US Treasury or agency instruments; (c) high quality asset-backed
securities rated by at least two rating agencies and/or other high quality
notes issued by Corporations; (d) interest rate futures and swaps to
manage currency risk in the portfolio, as well as its duration relative
to benchmark; and (e) cash deposits and repos.
■ P2, which is generally invested in US Treasuries, other sovereign and
agency issues and mortgage-backed securities.
■ P3, which comprises a global fixed income portfolio and a mortgagebacked
securities portfolio (managed by external managers).
■ P4, which is an outsourced portion of the P2 portfolio (managed by
external managers).
■ P6, which is invested in short-term local currency money market
instruments and local government securities.
FY09 LIQUIDITY RISK HIGHLIGHTS
On June 30, 2009, IFC’s liquidity level stood at $17.9 billion ($14.6 billion on
June 30, 2008). Current levels of liquid assets also represented 163% of
the sum of (i) 100% of committed but undisbursed straight senior loans;
(ii) 30% of committed guarantees; and (iii) 30% of committed client risk
management products (96% on June 30, 2008).
FUNDING RISK
IFC’s primary objective with respect to managing funding risk is, through
the adoption of the key financial policies described above, to maintain its
triple-A credit ratings and, thereby, maintain access to market funding as
needed at the lowest possible cost.
4 Excluding “loan-like” debt securities.
15