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Report BFA - Bankia 2015 / Risk managementRisk profile

Based on the distribution of risk-weighted assets (RWAs), Bankia’s risk profile shows a clear predominance of credit risk, as can be observed in the figure:

Credit risk

The main characteristics of the credit risk profile and its development during 2015 are as follows:

  • Some 61% of the total loan book is accounted for by the mortgage portfolio. The second largest portfolio is businesses, with 19%.
  • The distribution of loans to customers between the wholesale and retail segments remains similar to 2014, with 31% wholesale and 69% retail. The portfolio of real estate developmentrelated assets fell 34% in 2015 and represents only 1% of the total.
  • The bond portfolio decreased by 13.15 billion euros, mainly as a result of debt maturities.
  • The Bankia Group ended 2015 with non-performing assets (N PAs) down 3.55 billion euros, easily outperforming the budget. A substantial part of the reduction of exposure came through the process of selection and sale of non-performing portfolios, which started in 2013 and culminated in six sales during 2015, with the disposal of 1.91 billion euros of non-performing exposures. Excluding that amount, the change in N PAs attributable to management’s handling of risk monitoring and recoveries was 1.64 billion euros. Thanks to all this, the NPL ratio reached 10.6%, 2.3 points less than at the end of 2014.
  • By component, 55% of the doubtful assets are doubtful for objective reasons, including default, insolvency and litigation. 33% is doubtful for “subjective” reasons (reasons other than default), based on the impairment assessment applied to borrowers. The remaining 11% consists of refinanced or restructured exposures in a cure period. In these cases, a solution has been reached with the customer and the bank is waiting to see whether the solution has been effective. This result has been achieved while at the same time increasing the NPL coverage ratio, which went from 57.6% at year-end 2014 to 59.97% at the end of 2015.
  • The portfolio distribution of credit risk at the close of 2015, measured using exposure at default (EAD), expected loss, economic capital and regulatory capital, would be as shown in the accompanying chart.

Risk profile

Distribution of dountful loans by component

Credit risk
Public sector 45,740 180 0.4% 256 0.6% 179 0.4%
Banks 26,937 298 1.1% 134 0.5% 65 0.2%
Businesses 40,751 1,760 4.3% 1,715 4.2% 3,268 8.0%
Developers 1,744 90 5.1% 161 9.2% 687 39.4%
Mortgage 67,559 1,965 2.9% 1,193 1.8% 2,087 3.1%
Consumer 2,665 123 4.6% 80 3.0% 90 3.4%
Cards 3,376 65 1.9% 48 1.4% 37 1.1%
Micro-ent. & self-empl. 6,327 227 3.6% 149 2.3% 617 9.8%
Equity 241 39 16.1% 23 9.7% 2 0.9%
Total 195,341 4,746 2.4% 3,759 1.9% 7,034 3.6%

From an analysis of these data, it can be concluded that the bank has more than sufficient provisions and capital to face both expected and unexpected losses with a very high level of confidence.

The bank’s credit risk policy was approved by the Board of Directors of Bankia and BFA in July 2015. The policy objectives are to maintain responsible, stable lending in line with the bank’s strategy; set prices appropriately; limit concentration; ensure quality of information; and align the risk policy with capital needs.

The general criteria for credit risk approval are implemented through five action themes:

  1. Responsible lending: The bank must offer the financing that best meets the customer’s needs and ability to pay. At the retail level, the customer must be given the necessary information to understand the risks associated with the financing.
  2. Retail and SME banking focus: The financing of real estate activities, projects, acquisitions and assets is restricted.
  3. Knowledge of the customer’s creditworthiness: This must be founded on a thorough analysis of the customer’s credit history and ability to pay, as well as a knowledge of the customer’s sector.
  4. Appropriate lending: The financing must be consistent with the customer’s size and profile, balanced between short and long-term finance and in line with the collateral valuation.
  5. Calibration of environmental and social risks: The environmental impact of the customer’s business activity must be taken into account. The granting of new loans to customers who do not respect human and labour rights is also restricted.

A diversification strategy, setting limits per individual and per sector, is needed. The credit risk policy also introduces specific approval criteria for each portfolio segment. For instance, the rating and coverage guidelines for consumer loans are different from those for mortgage lending and for consumer and credit card finance.

Market risk

Market risk is the risk of losses arising from adverse movements in the prices of the financial instruments in which Bankia trades.

During 2015, as a result of the undertakings given in the Recapitalisation Plan, the bank’s activity in financial markets was still limited. Specifically, its proprietary trading activity remained on hold, reducing market risk and the need for capital to cover it.

During 2014 and 2015, Bankia invested considerable effort in preparing a study on the updating of market risk measurement systems

Nevertheless, during 2014 and 2015 Bankia invested considerable effort in preparing a study on updating its systems for measuring market risk, so as to improve the current metrics, meet the new regulatory challenges and respond appropriately to the need for the group to take part in the various exercises organised by the European Banking Authority (EBA) and the ECB, as it did in various tests during 2015.

The result of this study, together with the study of counterparty risks, gave rise to the presentation and approval of a project to update the bank’s market and counterparty risk platforms.

Within the approved project, the market risk challenges for 2016 include integrating all market risk operations, tools and reporting in a single application and taking part in all the exercises proposed by the EBA and the ECB.

Counterparty risk in financial markets

Counterparty credit risk is the risk that a counterparty will fail to meet its contractual obligations, giving rise to a loss for the bank in its financial market activity.

In 2015, completing the project launched at the end of 2014, the calculation of the credit valuation adjustment (CVA) and its transmission to accounts was automated. At the request of the ECB, in June 2015 the CVA was modified and since then has been calculated using market data.

Also in 2015, a study was conducted on the systems for measuring counterparty risk and a project was approved to update the platform (see market risk information), which will need to be implemented in 2016.

The calculation of the capital consumption of the non-financial entities’ derivatives was modified during the year to reflect the future potential risk of their operations. Bankia also became a member of the London Clearing House for transactions in euros. In addition, the bank took part in various counterparty risk exercises required by the EBA and the ECB.

Interest rate risk in the banking book

Interest rate risk in the banking book is the risk of loss resulting from adverse movements in market interest rates. Changes in interest rates affect both net interest income and the value of assets and liabilities. The intensity of the impact depends to a large extent on the maturity and repricing structure of assets, liabilities and offbalance-sheet positions. At Bankia, the management of interest rate risk in the banking book, as with other risks, is based on a clear separation of roles and responsibilities.

In 2015, Bankia improved the scope of measurement and control of this type of risk. At the end of the year, the sensitivity limits were adapted based on the lowest risk profile consistent with the structure of the bank’s balance sheet. At the same time, the perimeter and frequency of calculation at group level was increased.

Additionally, the foundations were laid for the development during 2016 of a broader range of behavioural assumptions, in line with international best practices. Work is under way to develop periodic tests of the banking book, following the guidelines and formats of the EBA and ECB stress tests.

Liquidity and funding risk

Bankia wishes to maintain a long-term funding structure in accordance with the liquidity of its assets, seeking maturity profiles that are compatible with the generation of stable, recurring cash flows. The aim is to manage the balance sheet without liquidity strains in the short term.

To that end, the group identifies, controls and monitors its liquidity position daily. In line with the retail business model on which its banking activity is based, the bank’s main source of funding is customer deposits. To cover any additional liquidity requirements the bank uses the national and international capital markets and has sizeable funding activity in the repo markets. As a complementary measure, in case of crisis situations, the bank holds various assets as collateral at the ECB, which allow it to obtain immediate liquidity. Moreover, constant asset surveillance identifies the assets that can be used immediately as a liquidity reserve in times of market stress.

As a complement to the monitoring of liquidity risk in normal business conditions, an action framework has been designed that will help prevent and manage liquidity stress events. The cornerstone of this framework is the Contingency Funding Plan (CFP), which defines the committees responsible for plan monitoring and activation and establishes a protocol that sets out responsibilities and internal and external communication flows, as well as the action plans to bring the risk profile back within the bank’s tolerance limits. The CFP is accompanied by the establishment of metrics in the form of specific monitoring alerts and the development of metrics complementary to the regulatory liquidity and funding risk indicators.

In 2015, Bankia strengthened the liquidity risk management framework by developing periodic stress testing programmes for different types of crisis and time horizons and by fine-tuning the basic intra-day liquidity indicators. Looking to 2016, the bank has set itself the goal of more fully integrating the regulatory liquidity measures in management and taking measures to improve its long-term funding profile.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed processes or systems, human factors or external events. This definition includes legal risk, but excludes reputational risk.

To manage operational risk, Bankia aims to:

  • Promote a culture of operational risk management, oriented in particular to awareness building, acceptance of responsibility, commitment and service quality.
  • Ensure that operational risk is identified and measured.
  • Apply continuous improvement systems in processes, control structure and mitigation plans.
  • Find new risk transfer mechanisms that will limit exposure.
  • Ensure that contingency and business continuity plans are in place.

In 2015, the group contacted various leading insurance companies and brokers to study the options for covering operational losses, especially cyber risk.

The bank also collaborated in the startup of an online training plan, aimed at branch staff, covering the basics of operational risk and operational risk management in branches.

Additionally, Bankia developed a specific methodology for analysing operational risk in outsourced functions through the management units that oversee the outsourcing arrangements. This methodology has been implemented in a small number of layers and is expected to be extended to all of them in 2016, when the corporate ARO application is also due to be updated.

Environmental risk

Given the nature of its activity, a bank has only a very limited direct environmental impact. However, it exerts a very significant indirect influence through its decisions to invest in the assets and production activities of its customers. Consequently, the environmental risk inherent in customers’ production activity may be transferred to the bank in two ways:

  • Credit risk. Credit risk may arise from environmental impacts on the viability of the customer’s business, an increase in the business’s costs, loss of cash flows, or civil or criminal penalties, among other things.
  • Reputational risk. The threat of climate change and society’s awareness of environmental issues has prompted closer scrutiny of the environmental repercussions of the activities of banks’ customers, thus increasing the reputational risk for banks.

To manage environmental risk, Bankia has a tool that assigns corporate customers an environmental rating, which provides qualitative information complementary to that provided by the financial rating. The environmental rating can be used to assess the environmental impact of a company’s activities, how the environmental impact may affect the viability of the company’s businesses and, consequently, its influence on the bank’s credit risk.

The bank has established a scale of levels that reflect a company’s environmental situation:

Very low No impact
Low Specific impacts close to the location
The customer displays environmental management competencies
Low-risk sector/industry classification (CNAE)
Medium Broader impacts with several vectors
The customer displays inadequate environmental management competency or a need for environmental measures
Medium to high-risk sector/industry classification (CNAE)
High Complex/Foreseeable impacts now and in the future
Permanent monitoring measures needed
Medium to high-risk sector/industry classification (CNAE)

The tool can be used to obtain an overall rating of the portfolios of large and medium-sized companies. The result of the assessment shows that 75% of the obligors or customers and 62% of the drawn exposure is in portfolios rated as having low or very low environmental risk.

Very low 606 15.7% 6,658,533,092 39.5%
Low 2,433 63.0% 5,954,566,590 35.3%
Medium 761 19.7% 3,849,521,979 22.8%
High 60 1.6% 406,615,391 2.4%
Total 3,860 100.0% 16,869,237,053 100.0%

Taking the large and medium-sized businesses separately and looking at the percent distribution of the two portfolios in number of borrowers or customers, the figure is as follows:

Business borrowers by credit rating (%)

The percent distribution in drawn exposure is as follows:

Business borrowers by drawn exposure (%)

These figures confirm that the ratings are concentrated in the low and very low levels, for both business segments.


Last year, in a credit market context characterised by a moderate recovery and the persistence of difficulties in meeting loan obligations, especially under mortgage agreements, Bankia broadened its policy of offering its customers negotiated solutions, both in the early stages of delinquency (forbearance, surrender in satisfaction of debt) and in cases where the asset has already been foreclosed.

Bankia continued its policy of mortgage modifications, with the aim of enabling households to adapt their loans to their ability to pay, on the most flexible terms. A total of 12,341 modifications of this kind were carried out during the year.


Negotiated solutions since 2012

Negotiated solutions
Concept year Totals
2012 2013 2014 2015 transactions %
Total no. of homes handed over in lieu of payment 3.356 1.590 1.497 934 7.377 4,89%
Total no. of foreclosed homes 9.207 4.614 5.570 3.968 23.359 16,06%
Total no. of mortgage moldifications 19.049 23.178 14.079 12.341 68.647 42,68%
Total no. of consumer loan modifications 12.640 23.752 12.821 9.253 58.466 27,00%
Total no. of loans to self-employed/ businesses modified 3.402 5.667 3.477 3.588 16.134 9,37%
Total negotiated solutions 47.654 58.801 37.444 30.084 173.983 100,00%

At the same time, 934 transfers of homes in satisfaction of mortgage debt were accepted and the terms and conditions of 12,341 mortgages were adapted to the obligors’ real ability to meet their obligations to Bankia. In all cases, these were negotiated solutions, aimed at avoiding evictions among social groups of proven special vulnerability, while at the same time seeking to minimise the loss to the bank.

Since 2012 Bankia has accepted a total of 7,377 transfers of property in satisfaction of debt and has executed 68,647 mortgage modifications. In doing so it has helped mitigate one of the most dramatic consequences of the economic crisis for households, namely, the loss of their home as a result of the supervening impossibility of servicing the debt that was used to finance it. During 2015 a total of 3,968 homes were foreclosed (that is to say, recovered by the bank as a result of a court decision)..


Renegotiated consumer loans and loans to SMEs and the self-employed

The help that Bankia provides to customers in need is not confined to mortgage customers. Last year the bank also renegotiated the terms of 9,253 consumer loans and 3,588 loans to self-employed individuals and businesses. The cumulative totals since 2015 are 69,203 and 19,374, respectively.