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Report BFA - Bankia 2014 / Risk managementCredit risk

Risk policy

Risk policies are approved by the Board of Directors and are intended to achieve the following objectives:

  • Consistency in the general criteria for approving credit risk.
  • Marrying of specific criteria per segment with the institution’s strategic goals and with the economic environment in which it operates.
  • Risk-adjusted pricing.
  • Limits on risk concentration.
  • Data quality. Effective risk assessment requires information of an adequate nature and of sufficient quality, whereby the consistency and integrity thereof must be ensured.
  • Solvency.
  • Compliance. Risk policies must be complied with at all times, and any exceptions (granted for customers with whom there is a close relationship) must be signed off after being duly documented and justified.


  • Activity: focuses on individuals and small to medium enterprises in Spain. Transactions with larger businesses must be restricted to short-term finance, transactional banking and foreign trade products and services. The financing of real-estate activities, projects, acquisitions and assets is restricted.
  • Creditworthiness of the borrower: ability to pay, comprehensive view of the customer, knowledge of a customer and sector, etc.
  • Transaction: financing in accordance with the size and profile of a customer; appropriate balance of short and long-term financing; collateral valuation.
  • Environmental risk: environmental impact of a borrower’s business activity must be considered, along with that of any assets accepted as collateral.

In addition to these four major risk approval criteria, another relevant aspect is the need for diversification, with limits being set per customer and sector.

Of particular importance are the thresholds defined for finance to sectors that are controversial because of the impacts they have on society. This includes investing in or granting finance to arms manufacturers, companies that violate human rights or companies that perform any activity that might conflict with the institution’s ethics. Specifically, financing transactions or projects involving counterparties or targets that are companies with a proven connection to the manufacture, distribution or sale of controversial arms (antipersonnel mines, cluster munition, biological weapons or chemical weapons) is strictly prohibited. Finance is also not provided for the transactions or projects of companies in the arms or munitions industry incorporated or domiciled in countries involved in armed conflicts or featuring on the list of countries subject to arms embargoes by the UN Security Council or the EU, non-proliferation treaties and other international obligations. It is also prohibited to extend finance for operations or projects related to companies that are proven to have violated human rights.

The risk policies introduce specific credit approval criteria based on the portfolio segment, notably the setting of minimum credit rating grades and minimum collateral coverage ratios. Certain product-specific criteria are also in place, setting thresholds for aspects such as loan terms, minimum coverage, grace periods, etc., along with criteria for the correct use and control of said thresholds in general and specifically for customers being monitored.

As a general rule, it is prohibited to finance real-estate activity, except any investments earmarked for increasing the value of any pledged collateral or enabling divestment of property, minimising the final potential loss.

Another key feature of the credit risk policies is the raft of conditions in place to appraise eligible collateral to mitigate risk in lending transactions. As well as having to meet all the conditions regarding legal certainty and due documentation in all instances, specific requirements are defined for each type of collateral, such as low correlation, liquidity or valuation.

The institution acts early vis-à-vis risk exposures to customers to identify and try to avoid complex situations before they default

As regards risk monitoring, a business activity monitoring policy is in place, aimed at involving all areas of the bank in taking a forward-looking approach to the management of risk exposures to customers, so as to anticipate potential problems before they result in default.

A very important feature of risk management concerns refinancing and restructuring, aimed at adjusting finance to a customer’s current ability to meet its payment obligations. These arrangements must always be used as a means to solve a problem, never as a means of concealing or postponing it.


Risk is managed in accordance with the limits and instructions established in the policies laid down in the Risk Appetite and Tolerance Framework. A raft of tools is available to achieve this, which can be classified as follows based on their purpose:

  • I. Risk classification
    Rating and scoring tools are used to classify borrowers and/or transactions by risk level. Virtually all segments of the portfolio are classified, mostly based on statistical models. This classification not only informs decisions on risks but also enables the risk appetite and tolerance stipulated by the governing bodies to be incorporated through the thresholds established in the policies.

    All the methods for analysing the credit worthiness of borrowers and transactions are laid down in the “Credit Rating System” which segments risk according to the characteristics of borrowers and their transactions, and results in borrowers/transactions being assigned a rating.

    Two advisory bodies form an essential part of the system: the Ratings Committee (established in 2013, responsible for decisions in the wholesale business) and the Credit Scoring Committee (established in June 2014, responsible for supervising the models for the retail business). The purpose is to ensure portfolios are rated on a consistent basis based on information not collated using the models used to inform these decisions. Neither of these committees have executive powers, but are advisory bodies responsible for ensuring the entire rating and scoring system functions correctly. Risk classification also includes the so-called monitoring levels system, the aim of which to proactively manage a decline in the quality of loans related to business activities through classification into four categories:

    • Level I o high risk. Risks to be extinguished in an orderly manner.
    • Level II o medium-high risk. Reduction of the risk.
    • Level III o medium risk. Maintenance of the risk.
    • Other exposures deemed standard risks.

    Each level is determined in accordance with ratings, but also with other factors, e.g. activity, accounting classification, existence of non-payment, the situation of the borrower’s group. The level determines credit risk approval powers and manager assignment. All risks must be managed and are therefore assigned automatically according to their status.
  • II. Risk quantification
    Credit risk is quantified using two measurements: expected loss on the portfolio, which reflects the average amount of losses and is related to the calculation of provisioning requirements, and unexpected loss, which is the possibility of incurring substantially higher losses over a period of time than expected, affecting the level of capital considered necessary to meet objectives; i.e. economic capital.

    The credit risk measurement parameters derived from internal models are exposure at default (EAD), probability of default (PD) based on the rating, and loss given default (LGD) or severity. There are different approval levels for these parameters (conditional upon the current situation or averages that are representative of a full economic cycle) and therefore, various metrics can exist at the same time. One of these will be the most appropriate depending on the specific purpose.

    Expected loss and economic capital are forward-looking measurements of risk that the institution uses before the risk materialises. Risk must therefore be managed using these measurements; otherwise it will not be possible to identify any problems in advance. In this regard, the Risk Appetite and Tolerance Framework uses expected loss and economic capital as basic measurements to determine the risk thresholds that the institution must have in place and not exceed.
  • III. Risk forecasting
    Stress test models are another key element of credit risk management, allowing for the risk profiles of portfolios and the sufficiency of capital under stressed scenarios to be evaluated. This therefore contributes appropriately to capital planning. The purpose of these tests is to evaluate the systemic component of risk, while also considering the specific vulnerabilities of the portfolios. The impact of stressed macroeconomic scenarios on risk parameters and migration matrices are assessed. The tests may determine not only the unexpected loss (or required solvency), but also the impact on profit and loss.

    These stress tests are also becoming an increasingly important tool for supervising banks, as evidenced in 2014 during the European assessment by the EBA and ECB prior to adoption of the Single Supervisory Mechanism in November.
  • IV. Risk-adjusted return
    The profitability of a transaction must be adjusted by the costs of the various related risks, not only the cost of the credit. And it must be compared to the volume of capital to be assigned to cover unexpected losses or to comply with regulatory capital requirements.

    The risk measures are included in price-setting tools based on risk-adjusted returns (RAR). Therefore, it is possible to determine the price that meets the RAR target for a portfolio or the price that meets a minimum RAR below which the transaction would not be admissible.
  • V. Driving up business
    One of the functions of risk management is to create value and develop the business in accordance with the risk appetite established by the governing bodies. In this respect, the Risks Department is equally responsible for revitalising the lending business, providing tools and establishing criteria that identify potential customers, simplify the decision-making processes and allocate risk lines, always within pre-defined tolerance levels. It has tools and pre-authorisation and limit assignment processes for lending to both companies and retail customers.
  • VI. Recovery management
    Recovery management is defined as an end-to-end process that begins even before a payment is missed, covering all phases of the recovery cycle until a solution is reached.

    Bankia uses early warning models in lending to retail customers. They are designed to identify potential problems and offer solutions, which may entail adapting the conditions of the loan. In fact, a large number of mortgage loan renegotiations during the year resulted from the proposals put forward proactively by the institution.

    With business loans, the system of levels described above has the same objective: proactive non-performing loan management. Therefore, the entire portfolio is monitored and default is always the result of failed prior negotiations.

    Recovery management requires adaptable management tools for quantifying in real time the result of the activity of the various participants in the process, on the one hand, and for defining in a flexible manner different recovery strategies using all information available, including the valuations generated by the so-called recoveries models. The institution therefore worked hard in 2014 to avail of a new tool that will enable more efficient management and will contribute decisively to industrialising the recovery processes.

Risk profile

Based on the distribution of risk-weighted assets (RWAs), credit risk is clearly the main component of Bankia’s risk profile, and within this category, the mortgage loan portfolio, and then business loans.

The equities portfolio shrank by 83.5% during the year due to the sale of the stakes in Iberdrola, NH, Mapfre and Deoleo. The fixed income portfolio also decreased by 6.19 billion euros as bond issues matured.

One of the key milestones reached by the Bankia Group in 2014 was to slash NPLs by 3.48 billion euros, outstripping initial projections. This enabled it to cut its NPL ratio to 12.9%, 1.8 basis points below the figure at year-end 2013, while increasing the NPL coverage ratio to 57.6%. One factor contributing significantly to this achievement was the process of selecting and selling off NPL books valued at 1.49 billion euros.

Risk profile

Distribution of NPLs by component

56% of the NPL book is classed as doubtful for objective reasons, including arrears in payment, insolvency proceedings and lawsuits; 27% due to subjective criteria; and the remaining 17% comprise refinanced or restructured loans returned to the performing loan book.

Credit risk at year-end 2014 calculated using the metrics of exposure at default (EAD), expected loss, economic capital and regulatory capital is distributed across the following loan books.

Expected loss represents 4.1% of the total exposure considered, including the NPL book, and is therefore fully covered by the provisions set aside at the 2014 year end. Economic capital is generally less than regulatory capital, especially in the mortgage loan book. This latter loan book has been purged on applying the criteria regarding refinancing, whereby performing loans correspond to loans that have survived the crisis with no defaults on payment and also have a high average age.

The specific component related to concentration is the cause of economic capital exceeding regulatory capital in some loan books. This component is decreasing in line with the institution’s intention to reduce its major exposures. It can be concluded on analysing these data that the institution has more than sufficient provisions and own funds to cover expected and unexpected losses to a very high confidence level.

Credit risk
Loan book EAD Regulatory capital Economic capital Expected loss
Loans to public sector 43,309 241 0.6 % 320 0.7 % 175 0.4 %
Loans to banks 29,634 431 1.5 % 284 1.0 % 69 0.2 %
Loans to businesses 40,805 1,848 4.5 % 1,964 4.8 % 3,726 9.1 %
Loans to developers 2,535 134 5.3 % 388 15.3 % 865 34.1 %
Mortgage loans 69,918 1,949 2.8 % 1,117 1.6 % 2,574 3.7 %
Consumer loans 2,315 107 4.6 % 67 2.9 % 101 4.3 %
Credit cards 3,258 67 2.1 % 55 1.7 % 42 1.3 %
Loans to micro-enterprises and the self-employed 6;996 239 3.4 % 119 1.7 % 686 9.8 %
Equities 351 66 18.9 % 0 0:0 % 9 2.5 %
Total 199,121 5,082 2.6 % 4,314 2.2 % 8,248 4.1 %