Credit Risk Exposure to Certain Eurozone Countries

Certain eurozone countries are presented within the tables below due to concerns relating to sovereign risk. This heightened risk is driven by a number of factors impacting the associated sovereign including high public debt levels and/or large deficits, limited access to capital markets, proximity of debt repayment dates, poor economic fundamentals and outlook (including low gross domestic product growth, weak competitiveness, high unemployment and political uncertainty). Some of these countries have accepted “bail out” packages. Fundamentals have improved to some extent, with the growth outlook for these economies stabilising, competitiveness improving and external imbalances (i.e., current account deficits) narrowing. This adjustment process has been supported by the ECB’s Outright Monetary Transactions (OMT) program and the European Stability Mechanism (ESM) which have provided a credible (if untested) backstop and helped to contain funding costs. Nonetheless, risks remain elevated as evidenced by still wide credit default swap spreads in particular for the most vulnerable countries. Further, on February 7, 2014, the Second Senate of the German Federal Constitutional Court held that there are important reasons to assume that the OMT program exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the Member States and violates the prohibition of monetary financing of the budget. It therefore referred several questions to the Court of Justice of the European Union for a preliminary ruling. The European Court of Justice’s decision and its potential impact on the effectiveness of the OMT program are not yet assessable.

For the presentation of our exposure to these certain eurozone countries we apply two general concepts as follows:

  • In our “risk management view”, we consider the domicile of the group parent, thereby reflecting the one obligor principle. All facilities to a group of borrowers which are linked to each other (i.e., by one entity holding a majority of the voting rights or capital of another) are consolidated under one obligor. This group of borrowers is usually allocated to the country of domicile of the respective parent company. As an example, a loan to a counterparty in Spain is Spanish risk as per a domicile view but considered a German risk from a risk management perspective if the respective counterparty is linked to a parent company domiciled in Germany following the above-mentioned one obligor principle. In this risk management view we also consider derivative netting and present exposures net of hedges and collateral. The collateral valuations follow the same stringent approach and principles as outlined separately. Also, in our risk management we classify exposure to special purpose entities based on the domicile of the underlying assets as opposed to the domicile of the special purpose entities. Additional considerations apply for structured products. If, for example, a structured note is issued by a special purpose entity domiciled in Ireland, it will be considered an Irish risk in a “country of domicile” view, but if the underlying assets collateralizing the structured note are German mortgage loans, then the exposure would be included as German risk in the “risk management” view.
  • In our “country of domicile view” we aggregate credit risk exposures to counterparties by allocating them to the domicile of the primary counterparty, irrespective of any link to other counterparties, or in relation to credit default swaps underlying reference assets from, these eurozone countries. Hence we also include counterparties whose group parent is located outside of these countries and exposures to special purpose entities whose underlying assets are from entities domiciled in other countries.

Net credit risk exposure with certain eurozone countries – Risk Management View

in € m.

Dec 31, 2013

Dec 31, 20121

1

Numbers adjusted due to reporting methodology update in PBC, reflecting PBC guarantees of approximately € 2 billion.

Greece

466

646

Ireland

455

1,443

Italy

15,419

17,553

Portugal

708

1,187

Spain

9,886

11,737

Total

26,935

32,566

Net credit risk exposure is down € 5.6 billion since year-end 2012. This was mainly driven by decreases across Spain, Italy and Ireland from reductions in our NCOU portfolio. Cyprus credit exposure stands at € 16 million (risk management view) and will continue to be tightly managed.

Our above exposure is principally to highly diversified, low risk retail portfolios and small and medium enterprises in Italy and Spain, as well as stronger corporate and diversified mid-cap clients. Our financial institutions exposure is predominantly geared towards larger banks in Spain and Italy, typically under collateral agreements, with the majority of Spanish financial institutions exposure being covered bonds. Sovereign exposure is moderate and principally in Spain and Italy.

The following tables, which are based on the country of domicile view, present our gross position, the included amount thereof of undrawn exposure and our net exposure to these European countries. The gross exposure reflects our net credit risk exposure grossed up for net credit derivative protection purchased with underlying reference assets domiciled in one of these countries, guarantees received and collateral. Such collateral is particularly held with respect to the retail category, but also for financial institutions predominantly in relation to derivative margining arrangements, as well as for corporates. In addition, the amounts also reflect the allowance for credit losses. In some cases, our counterparties’ ability to draw on undrawn commitments is limited by terms included within the specific contractual documentation. Net credit exposures are presented after effects of collateral held, guarantees received and further risk mitigation, but excluding net notional amounts of credit derivatives for protection sold/(bought). The provided gross and net exposures to certain European countries do not include credit derivative tranches and credit derivatives in relation to our correlation business which, by design, is structured to be credit risk neutral. Additionally the tranche and correlated nature of these positions does not lend itself to a disaggregated notional presentation by country, e.g., as identical notional exposures represent different levels of risk for different tranche levels.

Gross position, included undrawn exposure and net exposure to certain eurozone countries – Country of Domicile View

 

Sovereign

Financial Institutions

Corporates

Retail

Other

Total2

in € m.

Dec 31,
2013

Dec 31,
20121

Dec 31,
2013

Dec 31,
2012

Dec 31,
2013

Dec 31,
2012

Dec 31,
2013

Dec 31,
2012

Dec 31,
2013

Dec 31,
2012

Dec 31,
2013

Dec 31,
2012

1

Includes impaired available for sale sovereign debt positions in relation to Greece as of December 31, 2012. There are no other sovereign related impaired exposures included.

2

Approximately 63 % of the overall net exposure will mature within the next 5 years.

3

Other exposures to Ireland include exposures to counterparties where the domicile of the group parent is located outside of Ireland as well as exposures to special purpose entities whose underlying assets are from entities domiciled in other countries.

4

Total net exposure excludes credit valuation reserves for derivatives amounting to € 136 million as of December 31, 2013 and € 231 million as of December 31, 2012.

Greece

 

 

 

 

 

 

 

 

 

 

 

 

Gross

52

40

605

715

1,338

1,501

9

9

0

0

2,004

2,265

Undrawn

0

0

18

8

101

160

3

2

0

0

122

170

Net

52

39

23

67

214

356

3

3

0

0

291

465

Ireland

 

 

 

 

 

 

 

 

 

 

 

 

Gross

765

932

721

1,438

6,177

6,612

48

56

1,9583

4,3003

9,669

13,338

Undrawn

0

0

6

14

1,680

1,581

1

2

3583

3663

2,045

1,963

Net

175

400

438

1,016

4,537

4,768

9

7

1,9513

2,9223

7,110

9,113

Italy

 

 

 

 

 

 

 

 

 

 

 

 

Gross

1,900

3,059

5,232

7,154

8,400

8,740

19,650

20,291

648

149

35,830

39,393

Undrawn

0

1

955

809

3,407

3,162

190

261

2

0

4,554

4,233

Net

1,374

2,969

2,500

3,263

6,529

6,653

6,994

7,749

572

(51)

17,969

20,583

Portugal

 

 

 

 

 

 

 

 

 

 

 

 

Gross

38

258

257

456

1,392

1,548

2,163

2,375

78

33

3,928

4,670

Undrawn

0

0

36

52

172

188

28

5

0

0

237

245

Net

25

153

221

322

849

769

282

501

78

32

1,456

1,777

Spain

 

 

 

 

 

 

 

 

 

 

 

 

Gross

1,473

1,659

3,349

5,605

9,288

10,296

10,721

11,106

637

221

25,468

28,887

Undrawn

4

0

662

563

3,321

2,684

521

547

3

0

4,510

3,794

Net

1,452

1,659

2,389

3,683

6,436

7,683

2,060

1,789

502

149

12,839

14,963

Total gross

4,228

5,948

10,164

15,368

26,595

28,697

32,591

33,837

3,321

4,703

76,899

88,553

Total undrawn

4

1

1,677

1,446

8,680

7,775

743

817

364

366

11,468

10,405

Total net4

3,078

5,220

5,572

8,351

18,566

20,229

9,347

10,049

3,103

3,052

39,666

46,901

Total net exposure to the above selected eurozone countries decreased by € 7.2 billion in 2013 driven largely by reductions in exposure to Italy, primarily to sovereign, but also to financial institutions and retail clients, as well as by reduced exposure to financial institutions and corporate in Spain and Other in Ireland.

Aggregate net credit risk to certain eurozone countries by type of financial instrument

 

Financial assets carried at amortized cost

Financial assets measured at fair value

Financial instruments at fair value through profit or loss

Dec 31, 2013

in € m.

Loans before loan loss allowance

Loans after loan loss allowance

Other1

Financial assets available for sale2

Derivatives

Other

Total3

1

Primarily includes contingent liabilities and undrawn lending commitments.

2

Excludes equities and other equity interests.

3

After loan loss allowances.

Greece

240

207

15

5

7

69

302

Ireland

1,342

1,332

2,840

502

800

1,518

6,993

Italy

10,678

9,735

4,143

875

3,559

(176)

18,136

Portugal

686

640

400

34

94

538

1,706

Spain

6,214

5,460

3,386

1,015

510

1,483

11,853

Total

19,159

17,373

10,784

2,431

4,970

3,432

38,990

 

Financial assets carried at amortized cost

Financial assets measured at fair value

Financial instruments at fair value through profit or loss

Dec 31, 2012

in € m.

Loans before loan loss allowance

Loans after loan loss allowance

Other1

Financial assets available for sale2

Derivatives

Other

Total3

1

Primarily includes contingent liabilities and undrawn lending commitments.

2

Excludes equities and other equity interests.

3

After loan loss allowances.

Greece

324

296

23

5

58

73

455

Ireland

2,188

2,181

2,982

978

1,387

3,048

10,576

Italy

11,345

10,615

3,817

1,585

4,132

(2,145)

18,004

Portugal

939

901

379

202

323

437

2,242

Spain

5,986

5,481

3,263

3,254

591

1,970

14,559

Total

20,782

19,474

10,464

6,024

6,491

3,383

45,836

For our credit derivative exposure with these eurozone countries we present the notional amounts for protection sold and protection bought on a gross level as well as the resulting net notional position and its fair value.

Credit derivative exposure with underlying assets domiciled in certain eurozone countries

 

Notional amounts

Dec 31, 2013

in € m.

Protection sold

Protection bought

Net protection sold/(bought)

Net fair value

Greece

1,260

(1,271)

(11)

(1)

Ireland

7,438

(7,321)

117

0

Italy

60,203

(60,370)

(167)

100

Portugal

10,183

(10,432)

(250)

7

Spain

28,452

(27,466)

986

(4)

Total

107,536

(106,860)

675

101

 

Notional amounts

Dec 31, 2012

in € m.

Protection sold

Protection bought

Net protection sold/(bought)

Net fair value

Greece

1,396

(1,386)

10

(8)

Ireland

8,280

(9,743)

(1,463)

55

Italy

60,638

(58,059)

2,579

145

Portugal

10,744

(11,209)

(465)

(5)

Spain

30,408

(30,004)

404

(8)

Total

111,466

(110,401)

1,065

179

In line with common industry practice, we use credit default swaps (CDS) as one important instrument to manage credit risk in order to avoid any undue concentrations in the credit portfolio. CDS contracts are governed by standard ISDA documentation which defines trigger events which result in settlement payouts. Examples of these triggers include bankruptcy of the reference entity, failure of reference entity to meeting contractual obligations (i.e., interest or principal repayment) and debt restructuring of the reference entity. These triggers also apply to credit default protection contracts sold. Our purchased credit default swap protection acting as a risk mitigant is predominantly issued by highly rated financial institutions governed under collateral agreements. While we clearly focus on net risk including hedging/collateral we also review our gross positions before any CDS hedging in reflection of the potential risk that a CDS trigger event does not occur as expected.

The exposures associated with these countries noted above are managed and monitored using the credit process explained within the “credit risk” section of this Risk Report including detailed counterparty ratings, ongoing counterparty monitoring as well as our framework for managing concentration risk as documented within our country risk and industry risk sections as outlined above. This framework is complemented by regular management reporting including targeted portfolio reviews of these countries and portfolio de-risking initiatives.

For credit protection purposes we strive to avoid any maturity mismatches. However, this depends on the availability of required hedging instruments in the market. Where maturity mismatches cannot be avoided, these positions are tightly monitored. We take into account the sensitivities of hedging instruments and underlying assets to neutralize the maturity mismatch.

Our governance framework is intended to enable adequate preparation for and an ability to manage euro crisis events in terms of risk mitigation and operational contingency measures which we consider to have been effective when Cyprus stresses escalated, with close coordination between Risk, Legal, Business and Other Infrastructure functions to promote consistent operational and strategic responses across the Bank.

Overall, we have managed our exposures to GIIPS countries since the early stages of the debt crisis and believe our credit portfolio to be well-positioned following selective early de-risking focused on sovereign risk and weaker counterparties.