Annual Report 2008 - ProCredit Bank

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Annual Report 2008
has always been robust, easy access to loans
from microcredit organisations compromised our
clients’ ability to meet their cumulative obligations.
Additionally, accelerating inflation created
liquidity constraints for many of our customers.
As part of our thorough review of the internal
factors that may have contributed to the rise in
arrears, we closely examined our credit analysis
and monitoring procedures, making further improvements
where possible. Our assessment of
clients’ overall levels of indebtedness was facilitated
by the expansion of the Central Credit Registry
and its takeover by the CBBH.
Net write-offs in 2008 totalled EUR 2.5 million, or
1.6% of the outstanding portfolio at year-end. The
bank takes a conservative approach to allowing for
loan impairment and was able to cover the portfolio
at risk by 145% with loan loss provisions.
As a responsible lender with prudent policies,
ProCredit Bank has always striven to maintain
high portfolio quality. Given the implications of
a global economic turndown, however, our activities
in this area have become more intensive. In
the coming year, we will continue to develop the
training of our loan officers to further strengthen
their credit analysis skills, making full use of centralised
data to assess their clients’ cumulative
level of indebtedness. The bank will also review
its internal controls and update procedures regarding
very small loans to minimise exposure to
credit risk.
Market Risk
Our management of market risk involves reducing
the impact of adverse movements in interest and
exchange rates on the bank’s profitability and on
its capital. With the local currency pegged to the
euro and its other foreign currency positions kept
at minimal levels, the bank does not face substantial
risk from foreign currency fluctuations.
To measure and mitigate interest rate risks, the
bank uses models based on maturity gap and duration
analysis. In 2008, it refined and developed
the capabilities of these tools to enable them to
support scenario analysis.
Liquidity Risk
ProCredit Bank is rigorous in its approach to
managing its exposure to liquidity risk, as was
reflected in the ample volume of liquidity which
it maintained throughout 2008: the ratio of liquid
assets to total assets was 30.4% at year-end. Our
loan portfolio provides a reliable source of cash inflow
through regular repayments, most of which
are made as monthly instalments.
The ALCO monitors the bank’s liquidity position
on at least a monthly basis and oversees the
parallel development of the loan and deposits
portfolios. It reviews the maturity structure of
the bank’s assets and liabilities and projects the
cash flow for both the following month and the
coming six months. The ratios of deposits held by
the largest 10 and 20 clients are also registered
and used as the basis of frequent stress testing.
The bank maintained a highly diversified base
of savings from individuals and legal entities in
2008, ensuring the stability of this major source
of financing. Following media attention, the financial
crisis impacted depositors’ confidence
considerably, which led to withdrawals of some
EUR 400 million in October, or 6.3% of total sector
deposits. During this bank run, ProCredit
Bank proved its ability to honour its obligations
by providing its clients with their funds on time
and in accordance with regular procedures. The
ratio of highly liquid assets to customer deposits
at year-end was 10.9%. Total deposits were
equivalent to a comfortable 105% of the total
loan portfolio, and additional sources of shortterm
liquidity and long-term funding were readily
available from sister ProCredit institutions
across the group throughout the year.
Operational Risk
Although the management of operational risk is
part of our overall risk management activities,
this is treated as a separate risk area to facilitate
effective control procedures. ProCredit Bank
shares its definition of operational risk with that
of the regulatory authorities: the risk of losses
resulting from inadequate or failed internal processes,
people and systems or from external
events. This also includes legal risk.