Annual Report 2010 - ProCredit Bank

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Annual Report 2010
As the vast majority of the bank’s loans are repayable
in monthly instalments, a borrower’s failure
to meet a payment deadline is treated as an initial
sign of potential default and draws an immediate
response from the bank. When a payment of interest
or principal is overdue by more than 30 days,
the loan in question is assigned to the portfolio at
risk (PAR>30), which serves as the key indicator of
classical credit risk.
As of year-end 2010 the bank’s overall PAR>30
stood at 3.51% of the gross loan portfolio, while
the portfolio of non-performing loans (over 90
days in arrears) amounted to 2.79% in volume
terms. These arrears levels are higher than in
2009 due mainly to the general deterioration
in the financial condition of local businesses. It
should be noted that ProCredit Bank’s PAR>90
is much better than the average for the Serbian
banking sector as a whole, where 12.84% of credit
exposures were still non-performing at the end
of December (source: Credit bureau organised by
the Serbian Bank Association; data are presented
on bank’s request).
One of the ways in which ProCredit Bank has met
the challenge to portfolio quality posed by the financial
crisis is to offer loan restructuring to those
clients that are judged to have the potential to regain
stability. Restructurings follow a thorough
analysis of each client’s changed payment capacity.
The decision to restructure a credit exposure
is always taken by a credit committee and aims at
full recovery. As of end-2010, the total volume of
restructured loans in the “watch” category came
to EUR 2.79 million.
ProCredit Bank Serbia takes a conservative approach
to loan loss provisioning. Impairment allowances
for individually significant exposures
are calculated on the basis of historical default
rates. For all unimpaired credit exposures, portfolio-based
allowances for impairment are made.
At the end of the year the coverage ratio (loan loss
provisions as a percentage of PAR>30) stood at
96.4%, and as a percentage of the total loan portfolio,
provisions amounted to 2.94%.
Loans considered to be irrecoverable are consistently
written off. Nonetheless, recovery efforts
continue even after a loan has been written off,
and collateral collection is rigorously enforced. In
2010 net write-offs totalled EUR 9.57 million, or
2.08% of the gross loan portfolio.
Counterparty and Issuer
Risk Management
Counterparty and issuer risks evolve especially
from the bank’s need to invest excess liquidity, to
conclude foreign exchange transactions, or to buy
protection on specific risk positions.
The risk of incurring losses caused by the unwillingness
or inability of a financial counterparty or
issuer to fulfil its obligations is managed according
to the ProCredit Group Counterparty Risk Management
Policy, which defines the counterparty
selection process and which sets limits on the size
of exposures, and according to the Group Treasury
Policy, which specifies the set of permissible
transactions and the rules for their processing.
As a matter of principle, only large international
banks and local banks with a good reputation and
financial standing are eligible counterparties. Exceptions
to size limits are conditional on approval
by the GRMC.
Country Risk Management
Given ProCredit Bank’s focus on lending to businesses
in the local market, it does not normally
enter into cross-border transactions, and therefore
its exposure to country risk is limited. However,
the bank sometimes needs to exchanges
currencies with other members of the ProCredit
group. The group as a whole is exposed to country
risk insofar as all ProCredit banks operate in transition
economies or developing countries. However,
over the years the ProCredit business model
has proven to be relatively resistant to macroeconomic
and political shocks.
Liquidity Risk Management
To determine the robustness of the bank’s liquidity
in the face of potential shocks, the bank performs
regular stress tests based on scenarios defined
as a group standard by the Group Liquidity
Risk Management Policy. Whenever necessary to
bridge liquidity shortages, ProCredit Bank Ser-