Annual Report 2002 (pdf, 1319K) - WestLB

20
Lending Business
The traditional lending business (excluding
specialised finance) which is one of the core
businesses of WestLB AG, was severely affected
by the weak development of the economy and an
increased number of corporate bankruptcies in
2002. In light of this and in view of a greater focus
on risk and profitability, we selectively reduced
the lending volume. Excluding the lending
business of Landesbank NRW, the lending volume
averaged € 42.9 billion in 2002. This represents
a decline of around 7% compared to 2001. In
Germany, the lending volume decreased by
roughly 11% and outside Germany by about 5%.
A series of bankruptcies, but also corporate fraud
and accounting scandals (ENRON, WorldCom),
resulted in markedly higher loan loss provisions
than in the previous year.
Portfolio Management Refined
In 2002 we maintained and refined the greater
focus on risk and profitability in the lending
business which we had initiated in earlier years.
In addition to specific risks, the management
of the overall credit portfolio has now assumed
greater importance. The newly created central
credit portfolio management function has been
integrated in the credit risk business model
(origination, portfolio management and placement)
and reports to the Credit Portfolio Committee
composed of the risk, client and one product
Board members. The portfolio management unit
has the task of analysing the credit portfolios of
WestLB AG in respect of concentrations of individual
and sector risks, limiting them and initiating
corresponding controlling measures. In the
case of new lending business, the unit provides
benchmark information on pricing/profitability,
assesses the impact on the overall portfolio
and gives recommendations on the structuring
of individual transactions. In addition, the
regulatory and economic tying up of capital
in the lending business is optimised from the
overall bank point of view through investment
of released capital in the secondary market asset
portfolio. In this connection several measures
have been implemented since October 2002
with the aim of freeing a substantial amount
of equity capital and improving profitability.
Under the requirements of the Basel II accord,
internal rating systems have become very
important and will be a crucial factor for the
competitiveness of an international bank.
WestLB has had an internal rating system for
corporate clients for more than 13 years and
further rating systems for the major portfolios
of the Bank have been added over the years.
The award of a rating is an integral element
of the credit analysis process. Moreover,
ratings play an important role in the riskreturn
management of the Bank. The existing
procedures are currently being refined and at
the same time supplemented by rating systems
for smaller client and special portfolios. The
decisive aspect here is to obtain a differentiated
rating which is able to predict loan losses.
During 2003 the new and revised systems will
gradually be introduced in the Bank. At the
same time a rating database will be established
as a technical platform, which will make it
possible to see the historical development of all
ratings for all business transactions. The aim is
to achieve a complete rating cover of the overall
Bank portfolio from 2004 onwards.