Main Credit Exposure Categories


Our credit lending activities are governed by our Principles for Managing Country and Credit Risk. These principles define our general risk philosophy for credit and country risk and its methods to actively manage this risk. The principles define key organizational requirements, roles and responsibilities as well as process principles for credit and country risk management and are applicable to all lending activities undertaken by the Group. Key elements of the principles with relation to the underwriting process include:

  • Independence of our credit risk management function from our business divisions.
  • The internal rating of each borrower, as the rating is an essential part of our underwriting and credit process and builds the basis for correct risk appetite determination and adequate pricing of transactions. Ratings must always be kept up-to-date and documented.
  • Credit approvals are based on credit authority which is assigned to individuals based on personal and professional qualification and experience. Authorities are reviewed annually and are valid until withdrawn.
  • Credit approvals are documented by the signing of the credit report by the respective credit authority holders and retained for future reference.

Our various business divisions require individual and customized credit processes performed by independent credit risk units in order to assess and determine the underling risks most appropriately. While this approach is designed to ensure high quality and tailor-made risk management, consistency of approach demands that all divisional credit risk units must follow the same fundamental credit risk management principles described above to ensure consistency of approach. Underwriting standards for our credit units are embodied within credit policies, guidelines and portfolio strategies for each appropriate loan category and are reviewed at least annually. The respective loan portfolios are also subject to frequent monitoring and reporting. For the major loan categories the process applied together with portfolio characteristics are highlighted below.

In the following tables, we show details about several of our main credit exposure categories, namely loans, irrevocable lending commitments, contingent liabilities, over-the-counter (“OTC”) derivatives and debt securities available for sale:

  • “Loans” are net loans as reported on our balance sheet at amortized cost but before deduction of our allowance for loan losses.
  • “Irrevocable lending commitments” consist of the undrawn portion of irrevocable lending-related commitments.
  • “Contingent liabilities” consist of financial and performance guarantees, standby letters of credit and indemnity agreements.
  • “OTC derivatives” are our credit exposures from over-the-counter derivative transactions that we have entered into, after netting and cash collateral received. On our balance sheet, these are included in financial assets at fair value through profit or loss or, for derivatives qualifying for hedge accounting, in other assets, in either case, before netting and cash collateral received.
  • “Debt securities available for sale” include debentures, bonds, deposits, notes or commercial paper, which are issued for a fixed term and redeemable by the issuer, which we have classified as available for sale.

The following tables break down several of our main credit exposure categories according to the industry sectors of our counterparties.

 

Dec 31, 2011

in € m.

Loans1

Irrevocable lending commitments2

Contingent liabilities

OTC derivatives3

Debt securities available for sale

Total

1

Includes impaired loans amounting to € 9.4 billion as of December 31, 2011.

2

Includes irrevocable lending commitments related to consumer credit exposure of € 9.2 billion as of December 31, 2011.

3

Includes the effect of netting agreements and cash collateral received where applicable. Excludes derivatives qualifying for hedge accounting.

4

Loan exposures for Other include lease financing.

Banks and insurance

35,308

22,553

17,668

50,657

15,887

142,073

Fund management activities

24,952

4,931

2,432

8,943

1,127

42,385

Manufacturing

22,754

31,297

19,608

3,279

697

77,635

Wholesale and retail trade

15,045

8,412

5,527

610

251

29,845

Households

174,188

10,613

2,706

1,082

188,589

Commercial real estate activities

46,143

2,877

2,348

2,187

53

53,608

Public sector

16,412

1,479

104

8,625

18,872

45,492

Other

81,8744

45,833

23,260

4,241

2,494

157,702

Total

416,676

127,995

73,653

79,624

39,381

737,329

 

Dec 31, 2010

in € m.

Loans1

Irrevocable lending commitments2

Contingent liabilities

OTC derivatives3

Debt securities available for sale

Total

1

Includes impaired loans amounting to € 6.3 billion as of December 31, 2010.

2

Includes irrevocable lending commitments related to consumer credit exposure of € 4.5 billion as of December 31, 2010.

3

Includes the effect of netting agreements and cash collateral received where applicable. Excludes derivatives qualifying for hedge accounting.

4

Loan exposures for Other include lease financing.

Banks and insurance

38,798

22,241

17,801

32,315

19,943

131,098

Fund management activities

27,964

6,435

2,392

9,318

46,109

Manufacturing

20,748

31,560

18,793

3,270

2,536

76,907

Wholesale and retail trade

13,637

7,369

5,022

517

51

26,596

Households

167,352

9,573

2,537

842

180,304

Commercial real estate activities

44,119

3,210

2,196

1,577

70

51,172

Public sector

24,113

858

57

6,510

19,115

50,653

Other

74,2944

42,635

19,257

7,956

4,499

148,641

Total

411,025

123,881

68,055

62,305

46,214

711,480

Our credit risk profile composition by industry sector remained largely unchanged on a year on year comparison.

Loan exposures to the industry sectors banks and insurance, fund management activities, manufacturing and public sector comprise predominantly investment grade variable rate loans which are held to maturity. The portfolio is subject to the same credit underwriting requirements stipulated in our Principles for Managing Country and Credit risk, including various controls according to single name, country, industry and product-specific concentration. Material transactions, such as loans underwritten with the intention to syndicate, are subject to review by senior credit risk management professionals and (depending upon size) a credit committee and/or the Management Board. High emphasis is placed on structuring such transactions to ensure de-risking is achieved in a timely and cost effective manner. Exposures within these categories are mostly to good quality borrowers and also subject to further risk mitigation as outlined on the description of our Loan Exposure Management Group’s activities in the section Credit Exposure Classification and therefore, they are categorised as lower risk.

Within the category household, our loan exposure of € 174 billion as of December 31, 2011 (€ 167 billion as of December 2010) contained € 136 billion of mortgages, of which € 108 billion were in Germany. The € 39 billion of non-mortgage household lending related primarily to Consumer Finance comprising instalment loans, credit lines and credit cards as well as Private Wealth Management lending.

Our household loans are principally associated with our Private & Business Clients (PBC) portfolio comprising predominantly mortgage and to a lesser extent consumer finance business. Given the homogenous nature of this portfolio counterparty credit worthiness and ratings are derived by utilising an automated decision engine. The engine incorporates quantitative aspects (e.g. financial figures), behavioral aspects, credit bureau information (SCHUFA in Germany) and general customer data. These input factors are used by the decision engine to determine the credit worthiness of the borrower and after consideration of collateral evaluation, specific business rules, personal credit authority and in certain mortgage cases external and/or internal real estate appraisers the ultimate credit decision is made.

Mortgage business is principally the financing of owner occupied properties sold by various business channels in Europe, primarily in Germany but also in Spain, Italy and Poland, with exposure normally not exceeding liquidation value (after appropriate haircuts). Consumer Finance is divided into personal instalment loans, credit lines and credit cards. Various lending requirements are stipulated, including (but not limited to) maximum loan amounts and maximum tenors and are adapted to regional conditions and/or circumstances of the borrower (e.g., for consumer loans a maximum loan amount taking into account household net income). Interest rates are mostly fixed over a certain period of time, especially in Germany. Second lien loans are not actively pursued.

The level of credit risk of the mortgage loan portfolio is determined by assessing the quality of the client and the underlying collateral. The loan amounts are generally larger than consumer finance loans and they are extended for longer time horizons. Consumer Finance loan risk depends on client quality. Given that they are uncollateralized, compared to mortgages they are also smaller in value and are extended for shorter time. Based on our underwriting criteria and processes, diversified portfolio (customers/properties) and low loan to value ratios, the mortgage portfolio is categorised as lower risk and consumer finance medium risk.

Our commercial real estate loans are generally originated for distribution as securities (CMBS) or in the bank syndication market and accounted for as financial assets at fair value through profit and loss. Loans are generally secured by first mortgages on the underlying real property, and follow the credit underwriting requirements stipulated in the Principles for Managing Country and Credit risk noted above (i.e. rating followed by credit approval based on assigned credit authority) and are subject to additional underwriting and policy guidelines such as loan-to-value ratios of generally less than 75 %. Additionally given the significance of the underlying collateral independent external appraisals are commissioned for all secured loans by our valuation team (part of the independent Credit Risk Management function). Our valuation team is responsible for reviewing and challenging the reported real estate values. Excluding legacy exposures, the Commercial Real Estate Group does not retain mezzanine or other junior tranches of debt; Postbank holds an insignificant sub-portfolio of junior tranches, which is being held to maturity. Loans originated for securitization are carefully monitored under a € 3.25 billion pipeline limit. Securitized loan positions are entirely sold (except where regulation requires retention of economic risk), while we frequently retain a portion of syndicated bank loans. This hold portfolio, which is held at amortised cost, is also subject to the aforementioned principles and policy guidelines. Postbank loans are generally held to maturity and not sold in the secondary market. We also participate in conservatively underwritten unsecured lines of credit to well-capitalized real estate investment trusts and other public companies (generally investment grade). In addition, sub-performing and non-performing loans and pools of loans are generally acquired from other financial institutions at substantial discounts to both the notional amounts and current collateral values. The underwriting process is stringent and the exposure is managed under a separate € 3.5 billion portfolio limit. We provide both fixed rate (generally securitized product) and floating rate loans, with interest rate exposure subject to hedging arrangements. In addition, new Deutsche Bank unsecured exposure is de-risked via LEMG. Commercial real estate property valuations and rental incomes can be significantly impacted by macro-economic conditions and underlying properties to idiosyncratic events. Accordingly, the portfolio is categorised as higher risk and hence subject to the aforementioned tight restrictions on concentration.

The category Other loans, with exposure of € 82 billion as of December 31, 2011 (€ 74 billion as of December 31, 2010), relates to numerous smaller industry sectors with no individual sector greater than 5 % of total loans. The largest of these smaller industry sectors relates to financial intermediation, other business activities and transportation.

Our loans, irrevocable lending commitments, contingent liabilities and OTC derivatives-related credit exposure to our ten largest counterparties accounted for 4 % of our aggregated total credit exposure in these categories as of December 31, 2011 compared to 5 % as of December 31, 2010. Our top ten counterparty exposures were primarily with well-rated counterparties or otherwise related to structured trades which show high levels of risk mitigation, with the exception of one counterparty relationship.

The following tables break down several of our main credit exposure categories by geographical region. For these tables, we have allocated exposures to regions based on the country of domicile of our counterparties, irrespective of any affiliations the counterparties may have with corporate groups domiciled elsewhere.

 

Dec 31, 2011

in € m.

Loans1

Irrevocable lending commitments2

Contingent liabilities

OTC derivatives3

Debt securities available for sale

Total

1

Includes impaired loans amounting to € 9.4 billion as of December 31, 2011.

2

Includes irrevocable lending commitments related to consumer credit exposure of € 9.2 billion as of December 31, 2011.

3

Includes the effect of netting agreements and cash collateral received where applicable. Excludes derivatives qualifying for hedge accounting.

4

Loan exposures for Other include lease financing.

Germany

199,442

24,448

15,408

5,148

7,848

252,294

Western Europe (excluding Germany)

115,782

32,399

19,460

35,932

24,910

228,483

Eastern Europe

9,387

1,357

1,682

135

369

12,930

North America

54,962

63,318

23,884

28,070

5,523

175,757

Central and South America

4,775

852

1,803

396

79

7,905

Asia/Pacific

30,291

4,791

10,425

9,011

628

55,146

Africa

1,502

598

991

888

7

3,986

Other

5354

232

44

17

828

Total

416,676

127,995

73,653

79,624

39,381

737,329

 

 

Dec 31, 2010

in € m.

Loans1

Irrevocable lending commitments2

Contingent liabilities

OTC derivatives3

Debt securities available for sale

Total

1

Includes impaired loans amounting to € 6.3 billion as of December 31, 2010.

2

Includes irrevocable lending commitments related to consumer credit exposure of € 4.5 billion as of December 31, 2010.

3

Includes the effect of netting agreements and cash collateral received where applicable. Excludes derivatives qualifying for hedge accounting.

4

Loan exposures for Other include lease financing.

Germany

207,129

24,273

15,758

3,018

7,135

257,313

Western Europe (excluding Germany)

110,930

30,239

18,019

22,213

30,310

211,711

Eastern Europe

8,103

1,844

1,319

836

410

12,512

North America

54,887

59,506

22,063

26,765

6,464

169,685

Central and South America

4,121

575

1,427

1,792

61

7,976

Asia/Pacific

23,562

6,651

8,532

7,247

1,783

47,775

Africa

961

419

911

421

5

2,717

Other

1,3324

374

26

13

46

1,791

Total

411,025

123,881

68,055

62,305

46,214

711,480

Our overall loan book was relatively unchanged as of December 31, 2011, rising to € 417 billion versus € 411 billion as of December 31, 2010.

Our largest concentrations of credit risk within loans from a regional perspective were in Western Europe with a significant share in households, and North America. The concentration in Western Europe was principally in our home market Germany, which includes most of our mortgage lending business. Within the OTC derivatives business our largest concentrations were also in Western Europe and North America, with a significant share in highly rated banks and insurance companies for which we consider the credit risk to be limited.

In addition Postbank monitors credit risk concentrations to specific European Countries as well as to the structured credit portfolio.

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Deutsche Bank Annual Report 2011

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