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). 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. Although a recent Advocate General Opinion stated that the OMT program should be valid under European law, the Court of Justice of the European Union is not expected to issue a final decision until the summer of 2015. The newly announced Quantitative Easing (QE) programme will also help to lower funding costs across the Eurozone. The effectiveness of these measures so far has limited the contagion to other Eurozone bond markets. This has occurred despite the rising uncertainty around the future of Greece’s program following Syriza’s election victory in January 2015.

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, 2014

Dec 31, 2013

Greece

416

466

Ireland

750

455

Italy

14,808

15,419

Portugal

1,002

708

Spain

8,273

9,886

Total

25,249

26,935

Net credit risk exposure is down € 1.7 billion since year-end 2013. This was mainly driven by decreases across Spain and Italy mostly from reductions in our Sovereign exposure, partly offset by increases in Ireland and Portugal mainly driven by higher traded credit positions.

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 collateralised. Sovereign exposure is at what we view as a manageable level absent more generalized contagion spreading after an adverse event such as a Greek exit from the euro.

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 Eurozone 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 portfolio, but also for financial institutions predominantly based on 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 in the specific contractual documentation. Net credit exposures are presented after effects of collateral held, guarantees received and further risk mitigation, including 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 allow a meaningful 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

Total1

in € m.

Dec 31,
2014

Dec 31,
2013

Dec 31,
2014

Dec 31,
2013

Dec 31,
2014

Dec 31,
2013

Dec 31,
2014

Dec 31,
2013

Dec 31,
2014

Dec 31,
2013

Dec 31,
2014

Dec 31,
2013

1

Approximately 56 % of the overall net exposure as of December 31, 2014 will mature within the next five years.

2

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.

3

Total net exposure excludes credit valuation reserves for derivatives amounting to € 300 million as of December 31, 2014 and € 136 million as of December 31, 2013.

Greece

 

 

 

 

 

 

 

 

 

 

 

 

Gross

100

52

716

605

1,176

1,338

8

9

34

0

2,033

2,004

Undrawn

0

0

20

18

72

101

3

3

0

0

95

122

Net

89

52

107

23

134

214

3

3

34

0

367

291

Ireland

 

 

 

 

 

 

 

 

 

 

 

 

Gross

553

765

1,100

721

8,282

6,177

40

48

2,3502

1,9582

12,325

9,669

Undrawn

0

0

48

6

2,257

1,680

1

1

4762

3582

2,783

2,045

Net

(21)

175

524

438

5,154

4,537

5

9

2,3502

1,9512

8,012

7,110

Italy

 

 

 

 

 

 

 

 

 

 

 

 

Gross

4,673

1,900

5,736

5,232

8,512

8,400

19,330

19,650

1,310

648

39,560

35,830

Undrawn

0

0

952

955

3,064

3,407

199

190

28

2

4,242

4,554

Net

244

1,374

3,431

2,500

5,900

6,529

6,768

6,994

1,229

572

17,573

17,969

Portugal

 

 

 

 

 

 

 

 

 

 

 

 

Gross

(5)

38

404

257

1,053

1,392

2,023

2,163

205

78

3,680

3,928

Undrawn

0

0

37

36

122

172

31

28

0

0

191

237

Net

(76)

25

357

221

504

849

221

282

205

78

1,210

1,456

Spain

 

 

 

 

 

 

 

 

 

 

 

 

Gross

696

1,473

2,465

3,349

9,345

9,288

10,585

10,721

840

637

23,931

25,468

Undrawn

0

4

738

662

3,832

3,321

481

521

16

3

5,068

4,510

Net

275

1,452

2,084

2,389

6,834

6,436

1,894

2,060

792

502

11,879

12,839

Total gross

6,018

4,228

10,421

10,164

28,368

26,595

31,986

32,591

4,738

3,321

81,530

76,899

Total undrawn

0

4

1,795

1,677

9,348

8,680

715

743

520

364

12,378

11,468

Total net3

511

3,078

6,504

5,572

18,526

18,566

8,892

9,347

4,609

3,103

39,041

39,666

Total net exposure to the above selected eurozone countries decreased by € 625 million in 2014 driven largely by reductions in exposure to Spain and Italy, primarily related to sovereign, but also to retail clients, partially offset by higher exposure to financial institutions primarily in Italy.

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, 2014

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

201

182

92

0

85

28

387

Ireland

2,101

2,068

2,707

481

843

1,728

7,827

Italy

10,785

9,775

3,791

672

4,071

3,085

21,393

Portugal

639

588

306

20

36

558

1,507

Spain

5,622

4,983

3,642

231

510

2,015

11,381

Total

19,348

17,595

10,537

1,404

5,545

7,414

42,496

 

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

The above tables exclude credit derivative exposure, which is separately reported in the following table. 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, 2014

in € m.

Protection sold

Protection bought

Net protection sold/(bought)

Net fair value

Greece

901

(921)

(20)

2

Ireland

4,344

(4,158)

186

4

Italy

41,433

(45,253)

(3,821)

156

Portugal

5,876

(6,173)

(297)

6

Spain

18,061

(17,563)

498

10

Total

70,614

(74,068)

(3,454)

177

 

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

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.