Annual Report 2010 - ProCredit Bank

Financial Statements 59
Table below shows capital elements and calculation of capital adequacy
as per IFRS standards for the years ended on 31 December.
Tier 1 capital
2010 2009
Share capital 3,663,012 3,663,012
Share premium 2,776,745 2,776,745
Legal reserves 1,345,592 1,345,592
Retained earnings 773,336 773,336
Intangible assets (214,157) (251,010)
Total qualifying Tier 1 capital 8,344,528 8,307,675
Tier 2 capital 2,276,198 1,649,627
Deductions from equity (335,611) (335,611)
Total regulatory capital 10,285,115 9,621,691
Risk weighted assets
Assets weighted by credit risk 62,547,387 55,213,836
Open currency position 985,118 506,163
Total risk weighted assets 63,532,505 55,719,999
Capital adequacy ratio 16.19% 17.27%
During the year 2010 there were no additional increases of capital
compared to end of 2009.
A.2. Risk Bearing Capacity
In addition to regulatory capital ratios, the Group assesses its capital
adequacy by using the concept of risk bearing capacity to reflect the
specific risk profile of the Group, i.e. comparing the potential losses
arising from its operation with the bank’s risk bearing capacity.
The risk taking potential of the bank is defined as the equity (net
of intangibles) plus subordinated debt, which amounted to RSD
11,298,414 thousands as of the end of December 2010. The Resources
Available to Cover Risk (hereinafter: RAtCR) were set at
60% of the risk-taking potential, i.e RSD 6,779,048 thousands. The
table below shows risk bearing capacity limit and the level of utilisation
as of the end of December 2010 and 2009.
Limit Actual Limit Actual
in % in %
2010 60.0 36.7 11,298,414 4,146,018
2009 60.0 30.2 10,902,057 3,295,909
As the above table indicates, the Group showed a modest level of
utilisation of its RAtCR as of end of December 2010. All risks combined,
as quantified by the methods established in the group’s
policies, are considerably below the 60% of the group’s total riskbearing
potential as defined. Further information on the methods
of quantifying the various risk categories is given in the following
chapters.
B) Credit risk
The Group takes exposure to credit risk which is the risk that a
counterparty will be unable or unwilling to pay the debt amounts
in full when due. The Group’s primary exposure to credit risk arises
through its loans to customers.
In order to keep the credit risks on acceptable level the Group:
• Evaluates creditworthiness of each client individually including
his/her exposure to loans and off balance liabilities;
• Analyzes risks arising from the investment which is the loan
purpose;
• Determines limits of credit exposure to its clients;
• Approves loans only to creditworthy clients and gathers appropriate
means of collateral;
• Separates process of maintaining client relationship from the
process of assessing client’s creditworthiness, which applies
to all loans to medium clients;
• Takes mandatory down-payment of 20% to 30% for each financial
leasing contract with the client as the cushion against the
depreciation of the value of the subject of leasing.
B.1. Policy of Loan Approvals
To control the credit risk exposure, the bank has defined a prudent
lending policy. The clients that are subjects of the lending process
are carefully analyzed. The decisions on loan approval are made
on the basis of client’s loan repayment capability and appropriate
means of collateral as loan coverage. All clients must fulfil the following
criteria:
• To have stable and profitable business (in case of legal entities,
entrepreneurs and agriculture producers),
• Appropriate capability for future loan repayment (applies to all
clients),
• In case that the bank identifies maturity mismatches between
certain types of assets and liabilities in client’s balance sheet,
this mismatch has to be justifiable (in case of legal entities,
entrepreneurs and agriculture producers),
• Cash flow does not indicate potential problems (in case of legal
entities, entrepreneurs and agriculture producers),
• Good credit history and repayment behaviour in ProCredit
Bank and/or other banks (applies to all clients),
• To provide adequate collateral (applies to all clients),
• To have adequate management and organization of business (in
case of legal entities, entrepreneurs and agriculture producers).
In the light of the impact of the global financial crisis on the liquidity
and financial position of the Group’s borrowers, the Group has
tightened the level of creditworthiness of clients. Maximum exposure
which includes all loan instalments versus client’s monthly profitability
(net cash flow) was changed and now is on the level of 50 to 70%.
B.2. Loan Loss Classification
The Group has developed procedures for classification of loans and
off balance claims of the bank, with regards to the degree of credit
risk associated with the client. At the same time two methodologies
of loan loss classification standards were developed to satisfy
the requirements of:
1. Laws and regulations enacted by the National Bank of Serbia
(NBS); and
2. Internal loan loss provisioning policy.
Calculation of allowances for impairment – provisions against potential
losses for ProCredit Bank
The Bank calculates allowances for loan impairment at the monthly
level for the portfolio for which group provisioning is formed in the
course of automatic processing, and minimum once per year for
individual impairments – impairments determined at the level of
individual client for clients who meet specific conditions defined
in the text below (quarterly formation of an individual impairment
is also possible if there are indications of a change in claim value).
In case of group provisioning (provisions at the portfolio level) a
general weight for each risk class is applied through automatic
processing on the calculated basis, whereas in case of calculation
of individual impairment, impairment at the client level is individually
determined in accordance with the risk level the Bank is exposed
to.
Total impairment of balance sheet assets is the sum, the product of
risk class weight and the calculated basis for accounts receivable