Credit risk management

 

NIBC defines credit risk as the current or potential threat to the company’s earnings and capital as a result of a counterparty’s failure to make required debt or financial payments on a timely basis or to comply with other conditions of an obligation or agreement, including the possibility of restrictions on or impediments to the transfer of payments from abroad.

 

Credit risk at NIBC exists in different shapes and forms. Almost every activity at NIBC is related to credit risk: credit risk is present in the Corporate Loan portfolio, the Residential Mortgage portfolio, the Debt Investments portfolio, cash management and derivatives. Credit risk is also present in NIBC’s portfolio of Investment Management loans. This portfolio is discussed in note 54 to the consolidated financial statements.

 

Specifically for the Debt Investments portfolio, NIBC defines the credit risk as issuer risk, which is the credit risk on the issuer of the debt security (e.g. public bond).

 

Corporate loans

The Corporate Loan portfolio is one of the core portfolios of NIBC and has a size of EUR 8,572 million at 31 December 2009.

 

NIBC employs an internally developed methodology for quantifying the credit quality of its Corporate Loan portfolio. In line with Basel II regulations, the methodology consists of two elements: a counterparty credit rating (CCR) that reflects the probability of default (PD) of the borrower, and an anticipated loss element that expresses the potential loss in the event of default (loss given default, LGD), which takes into account the presence of collateral. All counterparties are reviewed at least once a year.

 

In terms of CCR, the credit quality is concentrated in the BB and B categories. With respect to collateral, almost all loans have some form of collateralisation. Loans can be collateralised by mortgages on real estate and ships, by receivables, lease receivables, liens on machinery and equipment, or by third-party guarantees and other similar agreements.

 

A third element which is also assessed internally is the exposure at default (EAD). It is defined as the amount that is expected to be outstanding at the moment that a counterparty defaults. Counterparties typically tend to utilise their credit lines more intensively when approaching default, which implies that the amount outstanding at default is expected to be higher than the current outstanding amount.

 

The assessment of these parameters is supported by NIBC’s internal Rating Monitoring System (RMS), which has been in use since 2000.

 

The PDs, LGDs and EADs that are calculated through NIBC’s internal models are used for the calculation of expected loss (EL) and Pillar-1 regulatory capital (RC). Internal ratings enable an objective comparison of the credit risk of different types of assets, making them an essential tool for the commercial and risk management departments to determine whether a transaction fits NIBC’s strategy and portfolio, as well as to determine an appropriate pricing. The risk-adjusted return on capital (RAROC), economic capital (EC) and stress testing are additional areas which make use of the above-mentioned parameters, although the values and methodologies for both EC and stress testing differ from those employed in Pillar 1. The section Economic Capital in this Risk Management section provides more information on this subject. PDs, LGDs and EADs are also used in the Basel II solvency report to the regulator.

 

NIBC enforces strict separation of responsibilities with respect to its internal rating methodologies and rating process, model development, model validation and internal audit.

 

The AIRB approach for the corporate and retail exposure classes has been adopted by NIBC and approved by NIBC’s regulatory authority, the DNB, since 1 January 2008. The DNB confirmed in 2009 its approval of NIBC’s use of the AIRB approach for calculating solvency requirements.

 

The PD and LGD methodologies make use of expert judgement on a number of rating indicators. Corporate loan products are considered to fall within four financing types (corporate lending, asset finance, acquisition finance and project finance), and for each of these financing types the relevant credit drivers and parameters are captured in the models.

 

Counterparty credit ratings and probability of default

The counterparty credit rating reflects the counterparty’s capacity to meet its financial obligations in full and in time. Counterparty credit ratings do not incorporate any recovery issues, as these are captured through the LGD internal estimates.

 

NIBC uses a through-the-cycle counterparty credit rating scale, which consists of 10 grades (1-10). Most of these grades are further divided in notches, by the addition of a plus or minus sign to show the relative standing within the rating grade. NIBC uses a total of 22 notches, each of which is mapped to the rating scale of the main international rating agencies. Each notch carries a PD, which quantifies the likelihood that the counterparty will go into default in the next one year. Furthermore, counterparty credit ratings are assigned a rating outlook. This assesses the potential direction of the counterparty credit rating over the medium term. In determining a rating outlook, consideration is given to any changes in the economic and/or fundamental business conditions.

 

The general methodology for determining a counterparty’s credit rating is based on several qualitative and quantitative rating indicators, such as the analysis of the business and financial profile of the counterparty, a cash flow analysis, a sovereign risk analysis, a peer-group analysis and a rating benchmark based on third-party models. Expert judgement is applied at the end of the rating process and determines what the final rating of the counterparty will be, taking into account the rating indicators of the various models.

 

The performance of the counterparty credit rating methodology is back-tested annually in order to ensure that consistency is kept throughout the portfolio and to measure the discriminatory power of the counterparty credit ratings. Furthermore, NIBC regularly benchmarks its counterparty credit ratings with external parties. The last benchmark took place in 2009.

 

Loss given default

Whereas counterparty credit ratings are assigned on a counterparty level, LGD ratings are facility-specific. The LGD ratings reflect the loss that can be expected in a downward scenario on a facility, if a counterparty defaults. NIBC’s internal LGD scale consists of 7 grades (A-F) and 10 notches, each of which represents a different degree of recovery prospects and loss expectations.

 

NIBC’s LGD philosophy is similar to the approach for counterparty credit ratings. The LGD methodology is also based on a combination of qualitative and quantitative rating indicators that include, among others, the assessment of the available collateral and/or guarantees, the seniority of the loan, the applicable jurisdiction, and the quality of the counterparty’s assets. Once the various LGD drivers have been assessed, the final LGD rating is based upon expert judgement.

 

As is the case for counterparty credit ratings, the maintenance of NIBC’s LGD models involves benchmarking and back-testing. Furthermore, NIBC is a founding member of the Pan-European Credit Data Consortium (PECDC), the largest international loan loss data pooling entity. This enables NIBC to exchange anonymous loss data with other large international banks for the purposes of enhancing LGD modelling capabilities, sharing of best practices, LGD calibration and benchmarking.

 

Distribution of corporate loans

Graphs 2-5 show the Corporate Loan portfolio split in regions and industry sectors at 31 December 2009 and 31 December 2008. The commercial real estate figures include an amount of EUR 616 million in securitised loans. This concerns the Mesdag Delta securitisation; NIBC has retained notes amounting to EUR 145 million, whereas EUR 471 million has been sold. Furthermore, the industry sector Financial Services includes a collateralised loan of EUR 396 million (the collateral is a pool of prime Dutch residential mortgages) to an investment-grade financial institution. The term Exposure includes both on- and off-balance sheet amounts and applies to all graphs in this section.

Graphs 2 and 3 Corporate loan exposure per region

Graphs 4 and 5 Corporate loan exposure per industry sector

 

 

The impact of the credit crisis on the Corporate Loan portfolio was stronger in 2009 compared to previous years but it still remained at acceptable levels. There was an increase in the level of provisioning but they did not reach extreme levels, in part due to the high level of collateralisation. However, the impact of the crisis differed between the various loan segments. Most new provisions were taken in leveraged finance, but other parts of the portfolio carry either no or negligible impairments and write-offs, as in the case of the Shipping portfolio.

 

Table 6 shows the average losses in basis points since 2003. Losses are attributed to the year in which the counterparty enters default (Basel II definition). The losses are based on the actual write-off on the loans and on the outstanding provision (31 December 2009) in the case the default was unresolved at year-end. Consequently, average losses are not necessarily constant, given that provision amounts change over time. The losses are related to the non-defaulted portfolio at the start of the year, containing on- and off-balance sheet amounts.

 

 

Table 6 Overview of average losses, Corporate Loan portfolio
IN BASIS POINTS		2009		2008		2007		2006		2005		2004		2003
Average loss		66		34		0		31		33		21		27

 

 

Segmentation of corporate loans

Corporate loans at NIBC are originated and managed in six separate segments. These segments are Commercial Real Estate, Infrastructure & Renewable Energy, Shipping, Corporate Lending, Leveraged Finance and Oil & Gas Services. The sections that follow provide details for each of these segments.

 

Note that this segmentation overview excludes a collateralised loan of EUR 396 million (the collateral is a pool of prime Dutch residential mortgages) to an investment-grade financial institution. This loan is managed by NIBC’s Treasury department and does not fall within the six segments described in this section.

 

Note 54 to the consolidated financial statements contains additional information on the Corporate Loan portfolio.

 

 

Commercial real estate

The Commercial Real Estate Loan portfolio on NIBC’s own book has a size of EUR 2,289 million at 31 December 2009 of which 98% is drawn.

 

These figures include an amount of EUR 616 million in securitised loans. This concerns the Mesdag Delta securitisation. NIBC has retained notes for an amount of EUR 145 million whereas EUR 471 million has been sold. The total Commercial Real Estate Loan portfolio consists of 198 mortgage loans to 43 counterparties. It is diversified across various commercial real estate classes and countries. Multi-family property financing accounts for 38% of the portfolio, which reduces significantly the concentration risk in the underlying collateral pool. Office and retail property financing account for 30%. Hotel financing and construction financing constitute 7% and 4% respectively. The remainder (21%) of the portfolio consists of financing of miscellaneous properties, including mixed use and industrial properties.

 

In terms of geographical distribution, 68% of the Commercial Real Estate Loan portfolio is located in the Netherlands, 27% in Germany and 4% in other EU countries.

 

The weighted average counterparty credit rating in this segment, excluding defaulted assets, is 6 on NIBC’s internal rating scale. In line with the market conditions, the majority of loans in the portfolio were downgraded one notch compared to 2008. The unfavourable market conditions in the commercial real estate segment, however, did not result in high levels of impairments. At 31 December 2009, the impairment amount on the Commercial Real Estate Loan portfolio was only EUR 1 million, representing a mere 1% of all impairments on corporate loans.

 

The yields in 2009 increased as expected; a further slight increase is foreseen. The downward pressure on the market value of the assets continues, although a slower pace was observed in the last quarter of 2009. In general, the generated cash flow (rental income and excess income from disposals) within the portfolio remains sufficient to service all debt obligations.

 

In 2010, EUR 182 million (8%) of the Commercial Real Estate Loan portfolio is due for refinancing. In 2011, this is EUR 112 million (5%). The largest part of the remainder (69%) matures in 2014 or later.

 

 

Infrastructure & renewable energy

The Infrastructure & Renewable Energy Loan portfolio had a size of EUR 1,601 million at 31 December 2009. In terms of geographical distribution 75% of the Infrastructure portfolio is located in the United Kingdom, 7% in the Netherlands, 6% in Germany and the remainder in the rest of Europe. The portfolio spans various industry sectors, of which infrastructure (35%), health/education (21%), utilities (13%) and trade (9%) are the most important.

 

The weighted average counterparty credit rating in this portfolio, excluding defaulted assets, is 5 on NIBC’s internal rating scale. At 31 December 2009, the impairment amount on the Infrastructure & Renewable Energy portfolio was EUR 3 million, or 3% of all impairments on corporate loans. These impairment levels are similar to those in 2008.

 

The market outlook for 2010 is positive, supported by the increased government spending in order to support the economic recovery.

 

The market for infrastructure in 2009 remained relatively stable from a risk point of view. A significant distinction can be made between the construction (approximately 20% of the portfolio) and the operational phase (approximately 80% of the portfolio). The risk profile of the construction phase is strongly related to the risk profile of the construction company involved. At the same time, the construction phase is characterised by substantial security packages, including performance bonds and letters of credit. The existence of such security packages results in a below-average risk profile, despite the current increased risk profile of individual construction companies. Throughout the portfolio, only the established European construction companies are involved in the infrastructure projects.

 

For the main part of the portfolio which is in operational phase, 90% of the projects carry only availability risk (i.e. the risk that the project will not be completed and available in time) and no market risks. As the availability risk is passed through to the operating and maintenance contractor, the remaining risk is that of the off-taker. For true Private Finance Initiative (PFI) transactions, 100% of the off-takers are government-related entities.

 

The Renewable Energy Loan portfolio is only a fraction of the Infrastructure portfolio, amounting to EUR 186 million (or 12% of the Infrastructure & Renewable Energy portfolio) at 31 December 2009. 52% of this portfolio is located in the Netherlands, 16% in Germany, 13% in the United States and the remainder in other EU countries. The European governments strongly focus on environmentally friendly and sustainable energy; the market outlook for 2010 is positive.

 

 

Shipping

In anticipation of a downturn, shipping deal flow during the peak of the cycle was limited as of the second half of 2007. The Shipping Loan portfolio exposure, which covers around 15% of NIBC’s total loan book, declined by 10% to EUR 1,255 million (of which 88% drawn) compared to year-end 2008. Due to the deteriorated market circumstances, the weighted average loan-to-value ratio weakened from approximately 57% at year-end 2008 to approximately 67% (excluding container box facilities) at year-end 2009. Within the portfolio, the top 10 exposures (obligor-based) represent EUR 372 million, or 30% of the portfolio.

 

The portfolio is diversified across different geographical areas and various shipping sub-sectors. Significant geographical areas are Asia/Pacific (40%), Europe (14%), North America (14%), the Netherlands (9%) and the United Kingdom (9%). Exposure is spread over four main shipping sub-sectors, namely tankers (48%), bulk vessels (17%) container boxes (13%) and container vessels (12%). The remainder of the portfolio (10%) includes, among others, financing of car carriers, and oil and gas support assets, such as accommodation barges.

 

2009 has been a difficult year for the global shipping industry, which was characterised by limited ship finance available from many traditional ‘shipping banks’, low utilisation of ships resulting from the worldwide economic recession causing dwindling cash flows, and looming overcapacity. The industry’s challenges, especially the excess tonnage issue, will continue in 2010, which is expected to become a very demanding year as well, despite some recent weak signs of improvement.

 

Impairments on NIBC’s Shipping Loan portfolio are negligible; there were only two impairments at 31 December 2009, amounting to EUR 0.4 million, taken in previous years. Although there have not been any new impairments in the portfolio during 2009, NIBC was faced with market-value and earnings-related breaches and restructurings. Increases in reviews with negative counterparty rating outlook, downward rating actions (resulting in a weighted average counterparty credit rating, excluding defaulted assets, of 6+ on NIBC’s internal rating scale) and credit-watch placements have also been recorded. Despite all negative developments, however, it is reassuring to see that this portfolio holds up well for now. Potential negative effects are, to a large extent, mitigated by a focus on modern tonnage (average age of security vessels is between 7-8 years) and fairly conservative underwriting standards combined with financing based upon longer-term time charters.

 

In addition to the Shipping Loan portfolio, the Shipping department of NIBC manages a legacy portfolio in the aviation industry sector. This portfolio amounted to EUR 75 million at 31 December 2009, or 1% of the total Corporate Loan portfolio. This portfolio is located in North America (37%), the Netherlands (33%), Asia/Pacific (19%), the United Kingdom (8%) and Europe (4%). The aviation portfolio carried an impairment amount of EUR 17 million at 31 December 2009, representing 15% of all impairments on the Corporate Loan portfolio.

 

 

Corporate lending

In 2009, Corporate Lending continued its focus on medium-sized to large-sized companies in the Benelux and Germany. Market activity increased over the year, and this resulted in an increase of the portfolio size from EUR 917 million at 31 December 2008 to EUR 1,230 million at 31 December 2009. The total exposure of the portfolio is spread over seven different industry sectors, with trade (30%), infrastructure (25%), manufacturing (13%) and financial services (9%) being the most important.

 

In terms of geographical distribution, 82% of the portfolio is located in the Netherlands, 7% in Germany and 11% in the rest of Europe.

 

The assets transferred to the DA department in 2009 were mainly originated in 2007 and in the beginning of 2008 and comprise highly levered assets that are sensitive to a sharp deteriorating market demand. Over the last year, impairment amounts increased by EUR 14 million to EUR 33 million. At 31 December 2009, impairments within the Corporate Lending Loan portfolio comprised 30% of all impairments on corporate loans.

 

The main portfolio risks are concentration risk and the current economic conditions. A mitigating factor for concentration risk is that the large exposures are mainly related to reputable corporate clients rated above average. On the whole, concentration risk decreased compared to 2008. In 2009, the overall credit quality of the portfolio has stabilised at a counterparty credit rating of 5- (excluding defaulted assets) on NIBC’s internal rating scale.

 

 

Leveraged finance

The size of the Leveraged Finance Loan portfolio managed by NIBC increased from EUR 986 million at year-end 2008 to EUR 1,141 million at 31 December 2009. The portfolio is spread over 69 different assets in 14 different industry sectors, as shown in graph 7. Exposure is located in the Netherlands (43%), the United Kingdom (23%), Germany (19%) and other EU countries (14%). The Leveraged Finance portfolio is monitored on a monthly basis.

Graph 7 Leveraged finance exposure per industry sector, 31 December 2009 (EUR 1,141 million)

 

 

In 2009, the focus continued on mid-market transactions in the Benelux and Germany. During the year the number of transactions in the market increased. Because of the absence of a syndication market, most transactions were closed without underwriting risk on the debt (i.e. on a club-deal basis) with relatively low final takes.

 

The transactions that were closed were all conservatively structured in terms of leverage, interest coverage, collateral and covenants and supported by well-known private-equity sponsors, who made substantial equity contributions. The pricing stabilised on the level of 2008.

 

Most of the new impairments within the Corporate Loan portfolio in 2009 were taken on leveraged finance assets. Over the last year impairment amounts increased to EUR 54 million, which represent 48% of all impairments on corporate loans at 31 December 2009. Provisioning in the Leveraged Finance Loan portfolio has stabilised, as well as the rate of downward rating migrations. The weighted average counterparty credit rating in this segment, excluding defaulted assets, is 6 on NIBC’s internal rating scale.

 

 

Oil & gas services

Over 2009 the size of the Oil & Gas Services Loan portfolio reached the amount of EUR 584 million. Total exposure is spread over six main industry sectors, of which drilling (46%), support activities (19%) and oil and gas extraction (9%) are the most important ones. In terms of geographical focus, the majority of clients are located in North-Western Europe and the United States, whereas the assets are located all around the world in key oil and gas areas.

 

The overall risk profile remained stable over 2009 although the risk components have changed. A key risk component is construction risk, which decreased over the year as the number of drilling vessels under construction decreased and two delayed projects were delivered. At 31 December 2009, about one third of portfolio exposure relates to assets under construction. About half of the portfolio consists of project financing and half of corporate financing. Project financing is primarily sensitive to availability or operating risk. All project financing activities are secured, as well as the majority of the corporate financing. Unsecured exposure is mitigated by comfortable order books, negative pledges and market position.

 

At 31 December 2009, the portfolio carried zero impairment amounts. The overall credit quality of the portfolio is reflected by a counterparty credit rating of 5- (excluding defaulted assets) on NIBC’s internal rating scale and is in line with the weighted average rating of 2008.

 

 

Residential mortgages

The Residential Mortgage portfolio at 31 December 2009 amounted to EUR 10,601 million and consists of residential mortgage loans originated in the Netherlands and Germany. The majority (94%) of the Residential Mortgage portfolio consists of Dutch mortgages. The other 6% comprises German mortgages. The total Dutch mortgage book of EUR 10,006 million is funded for EUR 4,783 million by external securitisations.

 

In terms of regional distribution, the Dutch residential mortgages are evenly distributed throughout the Netherlands. The majority of the German Residential Mortgage portfolio is located in former West Germany.

 

As of 1 January 2008, NIBC’s rating methodology for residential mortgages has received approval from the DNB to use the AIRB for calculating solvency requirements and reporting to DNB. The calculation of PD, LGD and EAD is performed by an in-house developed Basel II AIRB model, which has been in use since 2006. The PD estimates are dependent on a variety of factors, of which the key factors are debt-to-income and loan-to-value ratios. Minor factors which play a role in the PD estimates are several other mortgage loan characteristics, borrower characteristics and payment performance information. The PD scale is based on a continuous scale ranging from 0% - 100%.

 

The LGD estimates are based on a downturn scenario comparable to the downturn in the Dutch mortgage market in the 1980s. In this case, the indexed collateral value is stressed in order to simulate the proceeds of a (forced) sale of the collateral. The stress is dependent on the location and the absolute value of the collateral. Together with cost and time-to-foreclosure assumptions, an LGD is derived. The LGD estimate also takes into account whether a mortgage loan has a Dutch government guarantee (NHG guarantee), for which the LGD estimate will be lower in comparison to a mortgage loan without the NHG guarantee. The LGD estimate is also based on a continuous scale.

 

The validation of these estimates is performed on historical data and is carried out on a yearly basis. For the PD and LGD, the estimates are back-tested against realised defaults and realised losses. In this way it is ensured that the model still functions correctly in a changing economic environment.

Graph 8 Residential mortgages, outstanding balance development

 

 

Graph 8 shows the development of the outstanding balance of the Residential Mortgage portfolio between year-end 2008 and year-end 2009. The portfolio size has slightly diminished in this period.

 

Mortgage acceptance follows certain acceptance criteria when screening residential mortgage applications, further specified in note 54 to the consolidated financial statements. NIBC handles the arrears management of 70% of its Dutch Residential Mortgage portfolio itself, while 30% is handled by one of the major mortgage servicers. Over the past couple of years, NIBC has significantly strengthened the arrears management by insourcing the arrears management process of the mortgages. This process of insourcing was finalised in 2009.

 

An increase in defaults and losses was shown in 2009, due to current market circumstances. The defaults and actual credit losses in the Dutch portfolio have been extremely low in the past years. The German portfolio has not shown any credit losses at all. Table 9 shows an overview of the actual losses in the Dutch portfolio since 2005. Losses are expressed as basis points of outstanding balance.

 

 

Table 9 Overview of actual losses, Dutch Residential Mortgage portfolio
In basis points		2009		2008		2007		2006		2005
Actual loss		5		2		2		2		3

 

Debt investments

The Debt Investments portfolio contains issuer risk, which measures the risk of losing the principal amount on products like bonds and CDS positions (where it concerns sold protection) and it is calculated based on the book value. These positions are held in the Debt Investments and Trading portfolios. NIBC identifies the following three categories:

• Debt from financial institutions and sovereign entities;
• Securitisations; and
• Enhanced investments and credit fixed income funds.

 

Debt from financial institutions and sovereign entities

As part of NIBC’s cash management strategy, the credit risk on debt issued by financial institutions has increased from EUR 765 million at 31 December 2008 to EUR 1,509 million at 31 December 2009. The net exposure on sovereign entities was zero. Note 54 to the consolidated financial statements provides more information on debt from financial institutions and sovereign entities.

 

Securitisations

NIBC has been an active participant in the securitisation market as both an originator and an investor. Towards the year-end of 2007 the perspective on the securitisation market shifted, and both in 2008 and 2009 de-risking has been a key objective for the portfolio. Though de-risking activities have been quite successful, NIBC still holds exposure to the securitisation market. Tables 10 and 11 present an overview of the total exposure at 31 December 2009 and 31 December 2008, making a distinction between NIBC’s activities as an investor and as an originator, as well as whether a securitisation is consolidated on NIBC’s balance sheet. Where a securitisation programme is consolidated, the exposure to the underlying commercial real estate loans or residential mortgages is included in the total exposures presented in Note 54 on Credit Risk, in the corporate loans and residential mortgages sections respectively.

 

 

Table 10 Exposure to securitised products, 31 December 2009
Book value, in eur millions		As investor		As originator in non-consolidated securitisation programmes		Total net exposure to securitisations		As originator in consolidated securitisation programmes		Total gross exposure to securitisations
EU - ABS		19		-		19		-		19
EU - CDO		163		37		200		-		200
EU - CMBS		157		24		181		145		325
EU - RMBS		305		-		305		65		370
Total European SECURITISATIONS		644		61		705		210		915
NL - RMBS AAA		31		-		31		-		31
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		31		-		31		-		31
US - Collateralised 1		2		-		2		-		2
TOTAL US SECURITISATIONS		2		-		2		-		2
TOTAL SECURITISATION EXPOSURE		677		61		738		210		948
Concerns EU CDO exposure with predominantly US collateral.

 

 

Table 11 Exposure to securitised products, 31 December 2008
Book value, in eur millions		As investor		As originator in non-consolidated securitisation programmes		Total net exposure to securitisations		As originator in consolidated securitisation programmes		Total gross exposure to securitisations
EU - ABS		13		-		13		-		13
EU - CDO		191		48		239		-		239
EU - CMBS		170		26		196		127		323
EU - RMBS		448		-		448		61		508
Total European SECURITISATIONS		822		74		896		188		1,083
NL - RMBS AAA		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-
US - Collateralised 1		2		-		2		-		2
TOTAL US SECURITISATIONS		2		-		2		-		2
TOTAL SECURITISATION EXPOSURE		825		74		898		188		1,085
Concerns EU CDO exposure with predominantly US collateral.

 

 

NIBC as investor

The majority (92% at 31 December 2009) of NIBC’s net exposure to securitised products stems from its activities as an investor in securitised assets. In 2007, NIBC ceased its investment activities in securitised products and significantly reduced its exposure. Next to individual asset sales, the complete North American Residential Mortgage-Backed Securities (RMBS) portfolio was closed and the remaining North American assets (Commercial Mortgage-Backed Securities (CMBS) and Commercial Real Estate-Collateralised Debt Obligations (CRE-CDO)) were transferred from NIBC Bank to NIBC Holding. With these actions NIBC Bank’s exposure to the North American securitisation market decreased to a single position (a European Collateralised Debt Obligation (CDO) with primarily North American underlying collateral) equalling EUR 2 million at 31 December 2009.

 

For the Western European portfolio in NIBC Bank, de-risking opportunities (asset sales and asset-switch trades) are still actively pursued. However, these opportunities are scarce as there are still large differences between the buyers’ and sellers’ market. On a total level, the Western European portfolio decreased to EUR 644 million at 31 December 2009 from EUR 822 million at 31 December 2008. This exposure reduction of EUR 178 million is the net result of asset sales, (p)repayments, impairments and revaluation of assets on fair value through profit or loss.

 

In the last quarter of 2009 NIBC decided to invest part of its excess liquidity in the securitisation market, profiting from the currently attractive spreads. These investments are restricted to AAA-rated assets collateralised by Dutch residential mortgages with a maturity of 2-4 years. They equal EUR 31 million and are part of the Securitised Treasury Liquidity Investments portfolio.

 

Tables 12 and 13 show NIBC’s exposure to securitised products as investor, per collateral type and rating. Besides the described changes in exposure, some significant changes have taken place in the rating composition of the securitisation exposure as well. In 2009, all rating agencies adjusted their methodologies for the different asset classes. Consequently, a vast majority of all securitised products suffered from downgrades. For NIBC, these changes resulted in an increase of securitised products below investment grade (excluding equity) from EUR 29 million at 31 December 2008 to EUR 92 million at 31 December 2009. It is emphasised that the changed composition is not the result of trading activities.

 

 

Table 12 Exposure to securitised products (investor), 31 December 2009
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		10		6		1		1		1		-		-		19
EU - CDO		-		33		50		37		6		37		0		163
EU - CMBS		53		20		35		26		9		13		-		157
EU - RMBS		135		55		48		40		14		12		-		305
TOTAL EUROPEAN SECURITISATIONS		198		114		135		104		30		62		0		644
NL - RMBS AAA		31		-		-		-		-		-		-		31
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		31		-		-		-		-		-		-		31
US - Collateralised 1		0		1		-		0		-		0		0		2
TOTAL US SECURITISATIONS		0		1		-		0		-		0		0		2
TOTAL SECURITISATION EXPOSURE (INVESTOR)		229		115		135		104		30		62		0		677
Concerns EU CDO exposure with predominantly US collateral.

 

 

Table 13 Exposure to secritised products (investor), 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		4		7		1		1		1		-		-		13
EU - CDO		77		56		32		13		10		-		4		191
EU - CMBS		82		40		32		8		7		-		-		170
EU - RMBS		258		49		58		73		10		0		-		448
TOTAL EUROPEAN STRUCTURED CREDITS (LEGACY)		421		151		124		94		28		0		4		822
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		2		-		-		-		0		0		0		2
TOTAL US STRUCTURED CREDITS (LEGACY)		2		-		-		-		0		0		0		2
TOTAL SECURITISATION EXPOSURE (INVESTOR)		423		151		124		94		28		1		4		825
Concerns EU CDO exposure with predominantly US collateral.

 

 

NIBC as originator

NIBC has been active in the securitisation market as an originator for over ten years. The types of collateral for these securitisations include residential mortgages, commercial mortgages, leveraged loans and structured credits. NIBC’s programmes are known under the names Dutch MBS and Sound (residential mortgages), North Westerly (collateralised loan obligations), Mesdag (commercial mortgages) and Belle Haven and Orion (US collateralised debt obligations). Retained exposure within these securitisations (both consolidated and non-consolidated) at 31 December 2009 amounted to EUR 271 million, compared to EUR 262 million at 31 December 2008.

 

Tables 14, 15, 16 and 17 show an overview of NIBC’s securitisation exposure (originator) at 31 December 2009 and 31 December 2008. A distinction is made between exposures to securitisations that are not consolidated on NIBC’s balance sheet (tables 14 and 15) and securitisations that are consolidated (tables 16 and 17).

 

 

Table 14 Non-consolidated securitisation exposure (originator), 31 December 2009
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		-		-		-		-		-		-		-		-
EU - CDO		-		-		29		3		2		1		1		37
EU - CMBS		20		-		2		2		-		-		-		24
EU - RMBS		-		-		-		-		-		-		-		-
TOTAL EUROPEAN SECURITISATIONS		20		-		32		5		2		1		1		61
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		-		-		-		-		-		-		-		-
TOTAL US SECURITISATIONS		-		-		-		-		-		-		-		-
TOTAL SECURITISATION EXPOSURE (originator)		20		0		32		5		2		1		1		61
Concerns EU CDO exposure with predominantly US collateral.

 

 

Table 15 Non-consolidated securitisation exposure (originator), 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		-		-		-		-		-		-		-		-
EU - CDO		30		2		2		1		2		-		11		48
EU - CMBS		22		2		-		1		-		-		-		26
EU - RMBS		-		-		-		-		-		-		-		-
TOTAL EUROPEAN SECURITISATIONS		53		4		2		2		2		-		11		74
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		-		-		-		-		-		-		-		-
TOTAL US SECURITISATIONS		-		-		-		-		-		-		-		-
TOTAL SECURITISATION EXPOSURE (ORIGINATOR)		53		4		2		2		2		-		11		74
Concerns EU CDO exposure with predominantly US collateral.

 

 

Table 16 Consolidated securitisation exposure (originator), 31 December 2009
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		-		-		-		-		-		-		-		-
EU - CDO		-		-		-		-		-		-		-		-
EU - CMBS		72		-		-		-		-		73		-		145
EU - RMBS		3		-		16		10		21		-		16		65
TOTAL EUROPEAN SECURITISATIONS		75		-		16		10		21		73		16		210
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		-		-		-		-		-		-		-		-
TOTAL US SECURITISATIONS		-		-		-		-		-		-		-		-
TOTAL SECURITISATION EXPOSURE (originator)		75		-		16		10		21		73		16		210
Concerns EU CDO exposure with predominantly US collateral.

 

 

Table 17 Consolidated securitisation exposure (originator), 31 December 2008
Book value, in eur millions		AAA		AA		A		BBB		BB		<BB		Equity		Total
EU - ABS		-		-		-		-		-		-		-		-
EU - CDO		-		-		-		-		-		-		-		-
EU - CMBS		74		-		-		53		-		-		-		127
EU - RMBS		-		-		15		9		21		-		16		61
TOTAL EUROPEAN SECURITISATIONS		74		-		15		61		21		-		16		188
NL - RMBS AAA		-		-		-		-		-		-		-		-
TOTAL SECURITISED TREASURY LIQUIDITY INVESTMENTS		-		-		-		-		-		-		-		-
US - Collateralised 1		-		-		-		-		-		-		-		-
TOTAL US SECURITISATIONS		-		-		-		-		-		-		-		-
TOTAL SECURITISATION EXPOSURE (ORIGINATOR)		74		-		15		61		21		-		16		188
Concerns EU CDO exposure with predominantly US collateral.

 

 

NIBC’s consolidated securitisation exposure relating to its own securitisation programmes at 31 December 2009 equals EUR 210 million, compared to a total exposure to securitisations as an originator of EUR 271 million. As mentioned previously, the underlying collateral in NIBC’s consolidated securitisation exposure is included in the total exposures presented the corporate loans and residential mortgages sections. From the EUR 210 million, EUR 65 million relates to the Dutch MBS, Sound and Provide Orange transactions (included in item securitised residential mortgages on the balance sheet), and EUR 145 million relates to the Mesdag Delta transaction (included in item securitised loans on the balance sheet).

 

Note 54 to the consolidated financial statements provides more information on NIBC’s Securitisations portfolio, including a geographical distribution and impairments.

 

Enhanced investments and credit fixed income funds

Through the Enhanced Investments portfolio, NIBC invests in highly-rated debt. These debt investments are mostly issued by financial institutions that have at minimum a single-A rating. All investments in this portfolio have to be approved by the RMC on a case-by-case basis. During 2009, the portfolio was reduced significantly from EUR 694 million at 31 December 2008 to EUR 36 million at 31 December 2009.

 

The Credit Fixed Income Funds portfolio contains investments in fixed income funds managed by hedge funds and asset managers. During 2009, the portfolio was further reduced. Its total book value decreased from EUR 35 million at 31 December 2008 to EUR 12 million at 31 December 2009. This decrease is in line with the decision of NIBC to reduce the exposure to these funds as much as possible.

 

A breakdown of these portfolios can be found in note 54 to the consolidated financial statements.

 

 

Credit risk related to cash management activities

NIBC runs credit risk as a result of cash management activities. An example is the credit risk on accounts with other banks. These accounts are used for correspondent banking or third-party account providers, e.g. for Special Purpose Entities.

 

In 2009, NIBC’s risk management framework for cash management continued its conservative attitude that took into account the deteriorated global markets and concern about numerous financial entities.

 

NIBC only places its excess cash with a selected number of sovereign entities and investment-grade financial institutions. Limits currently only exist for short-term maturities up to one week, and vary per counterparty. If there are not enough counterparties in the market to place all excess cash, NIBC deposits it with the DNB, for which no limit is set. For the approved financial counterparties, a monitoring process has been set up within the FMCR department. Ratings of financial counterparties are verified on a daily basis, and limits are possibly adjusted in case of a perceived decline in creditworthiness.

 

 

Credit risk on derivatives

Credit risk on derivatives is the risk of having to replace the counterparty in derivative contracts. NIBC manages this risk based upon the marked-to-market value plus an add-on. The add-on reflects a potential future change in marked-to-market value during the remaining lifetime of the derivative contract.

 

Limits are set and monitored per counterparty on a discrete basis and compared to the mark-to-market plus add-on, taking into account collateral postings under a Credit Support Annex (CSA). Note 54 to the consolidated financial statements provides more information on the risk monitoring of credit risk on derivatives.

 

The counterparties can be split into financial institutions and corporate entities. With respect to financial institutions, NIBC only enters into OTC derivatives with investment-grade counterparties. NIBC has bilateral collateral contracts in place with all of the main financial institutions it does business with. These contracts aim to mitigate credit risk on the derivatives by means of CSA.

 

Under the CSA agreements, (cash) collateral is exchanged to account for changes in the marked-to-market value of the underlying contracts, usually on a daily basis. The increased volatility in several key market drivers (interest and foreign-exchange rates) continued in 2009, resulting in significant exposures between collateral exchange moments.

 

Changes in interest rates also affect the marked-to-market valuation of corporate derivative transactions, increasing the positive marked-to-market values and therefore also NIBC’s credit risk exposure on corporate entities. No CSAs are in place for these contracts, however this derivative exposure usually benefits from the security also supporting the related loan.

 

Graph 18 shows the geographical breakdown of corporate derivatives at 31 December 2009.

Graph 18 Corporate derivative exposure per region, 31 December 2009 (EUR 493 million)