Credit risk management at the Raiffeisen Group is geared explicitly to Raiffeisen-specific client and business structures. The Raiffeisen banks' client knowledge and decentralised individual responsibility play a key role in lending decisions and credit management. This is also true in cases where loans require the approval of Raiffeisen Switzerland because of their size or complexity.
Credit risks are reviewed and assessed in nominal and risk-weighted terms. Management decisions are also based on statistical loss metrics (i.e. value at risk) and scenario analyses. Risks are monitored using credit quality metrics (such as financial viability, loan-to-value ratios, counterparty ratings and rating changes), as well as portfolio characteristics (such as diversification across borrowers, industries and collateral types).
Credit risk is the most important risk category, due to the Raiffeisen Group's strong position in lending. The Raiffeisen Group generates a large part of its income by taking on credit risks in a controlled manner, and through the comprehensive and systematic management of these risks.
Development of loans and provisions
Raiffeisen Group lending by client segment
Generally prudent credit policy
Lending within the Raiffeisen Group is governed by a prudent credit policy and professional credit checking.
Mortgage loans by rank
Loan decisions are largely based on financial viability, loan-to-value ratios and the repayment schedule for the borrower's obligations. Most loans are granted on a secured basis.
Loans by collateral and property type
Raiffeisen Switzerland's main credit risks arise from its dealings with commercial banks and with corporate and public sector clients. The branches also extend secured loans to private individuals.
Raiffeisen Switzerland monitors, controls and manages risk concentrations within the Group, especially for individual counterparties, groups of affiliated counterparties and sectors. The process of identifying and consolidating affiliated counterparties is automated across the entire Raiffeisen Group.
Credit policy in the corporate client business
The Raiffeisen Group seeks to serve corporate clients with good or medium credit ratings.
Corporate client lending by rating category
Its risk tolerance in the corporate lending business is clearly defined and implemented with corresponding limits for the entire Group. The Raiffeisen Group's priority is to place the expansion of its corporate client business on a solid foundation within the framework of the dedicated corporate client strategy. Its commitment is underscored by the substantial investments it has made in its staff, systems and organisation.
Raiffeisen Group lending by sector (corporate clients and other clients
Active country risk management
As stipulated in the Articles of Association, foreign exposure is limited to a risk-weighted 5 % of the Raiffeisen Group's consolidated net assets. Raiffeisen banks may not provide any banking or financial services abroad. The Central Bank, Raiffeisen Switzerland B.V., Notenstein La Roche Private Bank Ltd and its subsidiaries can enter into commitments abroad. These commitments are limited and monitored on an ongoing basis.
Breakdown by country limits
Credit portfolio analysis and assessment
The Board of Directors is periodically apprised of the analyses and assessment of the quality of the Raiffeisen Group's credit portfolio. The analyses focus on sector concentrations and monitoring large individual exposures. In particular, they investigate the impact of severe macroeconomic difficulties on individual sectors and the overall credit portfolio.
Measuring credit risk
The credit risk of each individual counterparty is measured using three parameters:
- –Probability of default
- –Credit exposure at the time of default
- –Value of the collateral
The core of credit risk measurement is the rating system, which is developed and monitored by Group Risk Controlling. The rating system is used to assess the clients' creditworthiness and to determine the economic capital for limiting the individual credit risk positions. The Raiffeisen Group has implemented comprehensive rating system governance in connection with the internal rating systems. Rating system governance aims to organise internal rating system processes and responsibilities within the Group in a way that will consistently ensure the quality and effectiveness of the rating systems and their application. To avoid loopholes and conflicts of interest, tasks, powers and responsibilities were defined for stakeholders and key positions, and corresponding key controls were implemented.
Raiffeisen uses a conservative value-at-risk method and a portfolio model based on this method in order to measure credit portfolio risks for internal purposes. Particular attention is paid to potential concentration risks.
Assessment of the risk situation – credit risk
Credit exposure grew in line with the strategy while risk intensity remained low. Lending is generally conservative and collateralised. Top priority is given to ensuring the borrower's ability to keep up with payments.
Around 90% of the Raiffeisen Group's credit portfolio is covered by mortgages. Owner-occupied residential properties account for more than half of the credit portfolio. They are mostly single-family homes and apartments owned and occupied by private clients. Raiffeisen closely watches market developments with respect to owner-occupied residential properties and investment properties and monitors its portfolio extensively.
The individual client segments of the Raiffeisen Group's credit portfolio have been stable for years. Private clients represent over 70% of the volume. In the corporate client business, Raiffeisen remains sufficiently diversified and focuses on sectors with long-term growth potential. High-risk industries are handled with great caution.
Risk intensity remains low, largely due to the broad diversification of the credit portfolio and the long-term, conservative credit policy in terms of rating, valuation, loan-to-value ratios and affordability.
Regular stress tests show that the Raiffeisen Group's credit portfolio is robust and well-diversified, even under sharply deteriorating conditions.
Risks in the banking book
The banking book is exposed to interest rate risks and foreign currency risks. Risk associated with fluctuating interest rates is a major risk category owing to the Raiffeisen Group's strong positioning in interest operations. They are actively assumed within authorised risk limits in order to generate profit through maturity transformation.
Clear guidelines and limits apply to the management of interest rate risks within the Group – both on a consolidated basis and for individual legal entities. Risks are managed autonomously within this corridor by the individual legal entities, i.e. the Raiffeisen banks, Notenstein La Roche Private Bank Ltd and Raiffeisen Switzerland B.V. Risk managers have a well-developed set of risk management tools, including tools to simulate interest rate developments and assess their impact. The Central Bank department provides advice on asset and liability management within the Raiffeisen Group. Netherlands-domiciled Raiffeisen Switzerland B.V., by contrast, manages its interest rate risks with the help of a bond portfolio that replicates the interest rate risk profile of the issued structured products. The other subsidiaries of Raiffeisen Switzerland, ARIZON Sourcing Ltd and Investnet Holding AG, have no material risks associated with fluctuating interest rates in their balance sheet structure.
Group Risk Controlling monitors compliance with interest rate risk limits and the overall development of interest rate risks. It focuses on monitoring the interest rate sensitivity of equity capital and running simulations to analyse the impact on interest income. It calculates the value at risk for interest rates at various Group levels in addition to the interest rate sensitivity in order to monitor the overall risk situation.
Raiffeisen Group: Interest rate risks in the banking book
With respect to foreign currency risk, assets in a foreign currency are in principle refinanced in the same currency (matched book approach). This means foreign currency risk is largely avoided. The Treasury is responsible for managing the remaining foreign currency risk in the banking book.
Risks in the trading book
Of the entities within the Raiffeisen Group, the Central Bank of Raiffeisen Switzerland and Notenstein La Roche Private Bank Ltd run a trading book. Trading risks are strategically limited by using global limits. Risks are operationally limited by sensitivity and loss limits and by value-at-risk limits.
All traded products are depicted and assessed in a trading and risk management system. This enables trading book risks to be efficiently and effectively assessed, managed and controlled, and provides the ratios for monitoring all positions and market risks. Group Risk Controlling monitors trading risks on a daily basis, using market data and risk parameters that are independently checked for accuracy. Before new products are rolled out, Group Risk Controlling performs an independent evaluation of the risks.
Raiffeisen Switzerland: Limits in the trading book
Raiffeisen Switzerland: Holdings in the trading book
Liquidity and financing risks
The liquidity requirements apply on a consolidated basis at Raiffeisen Group level, at individual institution level to Raiffeisen Switzerland and to Notenstein La Roche Private Bank Ltd, and at the level of financial sub-groups, which includes both of these individual institutions. The individual Raiffeisen banks are exempted from compliance with regulatory liquidity requirements but still meet internal liquidity requirements.
Raiffeisen Switzerland's Treasury department centrally handles liquidity risk management for Raiffeisen Switzerland and the Raiffeisen Group. The Treasury department manages transfers of liquidity within the Group and ensures that refinancing and liquidity costs are allocated to their originators. The individual banks are required to deposit their portion of the liquidity requirements with Raiffeisen Switzerland and to maintain an appropriate refinancing structure. The Treasury department facilitates the Group's access to money and capital markets and ensures that these refinancing sources are properly diversified. The Treasury department performs regular stress tests and assesses liquidity trends in the Raiffeisen Group on an ongoing basis, taking regulatory and economic requirements into consideration. Group Risk Controlling ensures that monitoring is conducted independently.
Notenstein La Roche Private Bank Ltd has its own Treasury and its own access to money and capital markets so that it can comply with liquidity requirements at individual institution level. Independent monitoring is conducted by the Financial Risk Controlling department, which is organisationally part of Notenstein La Roche Private Bank Ltd, but reports to Group Risk Controlling.
Assessment of the risk situation – market risk
Market risk mainly consists of the risks associated with fluctuating interest rates in the banking book. Risk associated with fluctuating interest rates increased slightly in 2017 due to growth in the core business. The duration of assets changed very little compared to the previous year. Simulations have shown that interest rate risks are acceptable even in adverse interest rate scenarios.
Market risks in the trading book are diversified across equities, interest rates, foreign currencies and precious metals. The potential for losses amid serious market turmoil is considered low relative to total income. There were no significant year-on-year changes in risk exposure.
The Raiffeisen Group's liquidity situation is robust.
Operational and business risks arise in two ways: as the consequences of the banking transactions carried out by the Raiffeisen Group and by virtue of its function as an employer and owner/occupier of real estate. Viability and cost-benefit analyses determine whether a business risk should be avoided, reduced, transferred or borne. These risks are assessed in terms of the expected probability of occurrence and the severity of their impacts. This includes not only the financial impacts, but also the reputational and compliance consequences. The appropriateness and effectiveness of control measures are incorporated into the assessment. The analysis of the operational risks is supplemented by an assessment of the qualitative impact of a given risk event.
The Raiffeisen Group carried out comprehensive operational risk assessments over the course of the current year. The information gleaned from these assessments is documented in a Group-wide risk register that forms the basis for monitoring and controlling the overall operational risk profile. These assessments are conducted annually.
Information security – a discipline focused on data confidentiality, integrity and availability – is becoming increasingly important, especially with regard to threats from cybercriminals. For this reason, information security risks must be comprehensively managed based on a regular assessment of the threat situation. Appropriate and effective measures for safeguarding information and infrastructure are in place for this purpose. Raiffeisen complies with recognised standards and established practices throughout this process. Considerable importance is attached to protecting financial privacy. Stringent data protection standards are also gaining importance given the growing significance of digital channels.
Internal control system (ICS)
Raiffeisen's ICS comprises all the control structures and processes intended to ensure the proper conduct of operations, compliance with statutory, supervisory and professional provisions, and complete, reliable reporting.
The framework that underlies the Group ICS and ensures its functionality is defined at the control environment level. The elements of the control environment include internal regulations, independent supervisory bodies, organisational charts and job profiles.
Processes, risks and controls are closely interconnected at the process level. Operational risks are identified and assessed for each major process, and key controls defined from there. All key controls are documented and incorporated in the processes. There are many other risk reduction measures in addition to the key controls.
The Raiffeisen Group carries out an assessment of the ICS's appropriateness and effectiveness at least once a year. The implementation of improvements derived from the assessment is tracked and monitored.
Consolidated ICS reporting is included in the standard risk report prepared for the Executive Board and the Board of Directors of Raiffeisen Switzerland.
Early warning system of the Raiffeisen banks
Raiffeisen Switzerland operates an early warning system (EWS) designed to quickly identify adverse developments at Raiffeisen banks and branches, and avert potential damage. The early warning system comprises quantitative risk indicators for the individual Raiffeisen banks and branches as well as an ad-hoc reporting process for integrating qualitative information. Early warning events are analysed and, if the situation requires it, resolved with the active involvement of Raiffeisen Switzerland. Early warning events are independently assessed and monitored by the EWS Coordination Committee.
Business Continuity Management
Within the scope of business continuity management (BCM), Raiffeisen has adopted extensive measures to maintain operations even if critical resources become unavailable (staff, IT, buildings, suppliers). The specialist departments have various strategy options for keeping critical business processes functioning. Redundancy for all important IT components has been established and/or expanded at various sites.
To minimise potential losses and enable management to respond in an effective, coordinated fashion, Raiffeisen has put together crisis response teams and developed emergency plans in all important company units. It performs regular tests and drills to ensure the plans and organisational structures work properly and do not need to be updated. The crisis management team and organisation are regularly trained and tested using various scenarios to maintain BCM capabilities.
Assessment of the risk situation – operational risk
The operational risk situation has improved slightly and is within the risk budget defined by the BoD. A comprehensive ICS keeps losses attributable to operational errors low.
The threat of cybercrime and IT crime has generally increased. The Raiffeisen Group has responded to the threats and established a Cyber Security & Defence Centre.
The phased rollout of the new core banking solution (ACS) eliminates the risk associated with the developmental inflexibility of the previous solution (DIALBA).
No serious violations of client privacy or data protection were identified last year.
Legal and compliance risk
Legal & Compliance reports to the Raiffeisen Switzerland Executive Board and Audit and Risk Committee on major compliance risks quarterly and on legal risks semi-annually. Its reports contain overviews of the legal and compliance risks at Notenstein La Roche Private Bank Ltd and ARIZON Sourcing Ltd.
These risks, together with an updated compliance risk profile and the plan of action on risk derived from it in accordance with FINMA Circular 2017/1, are submitted to the Board of Directors once a year.
Raiffeisen Switzerland's Legal & Compliance department supports all of Raiffeisen Group's units in legal matters, ensures adequate regulatory competence at all levels, and actively manages legal risks. This also includes contractual risks. The department coordinates interactions with external lawyers where necessary.
Compliance is understood to mean adherence to all applicable statutory, regulatory and professional provisions and internal requirements with a view to identifying legal and reputational risks at an early stage, preventing such risks and ensuring that business is conducted properly.
Raiffeisen takes a comprehensive approach to compliance. Although Raiffeisen operates almost exclusively within Switzerland, it must comply with standards governing cross-border financial services (cross-border business) and international and national tax matters (tax compliance). It specifically focuses on the following activities and issues:
- –Raiffeisen monitors and analyses all relevant legal developments (regulatory monitoring) and participates in institutional commissions and working groups that cover the Swiss financial sector.
- –Raiffeisen has traditionally attached great importance to the "know your customer" principle on account of its cooperative business model and the customer proximity that the model entails. Regulations to combat money laundering and the financing of terrorism reinforce these principles and make them concrete.
- –Developments in the cross-border business are constantly monitored and analysed. While doing so, Raiffeisen systematically pursues a "passive provision of services" approach. This approach requires all activities to be initiated by the client and all legally relevant actions to be performed in Switzerland. Raiffeisen is prohibited from carrying out any activities outside of Switzerland, especially client-related trips abroad.
- –Raiffeisen advocates rigorous tax compliance strategies.
- –Raiffeisen adheres to market conduct rules and the resulting due diligence and advisory obligations.
- –Raiffeisen protects data and ensures bank-client confidentiality.
- –Raiffeisen is committed to fair competition and its actions are guided by strong ethical principles.
In the current year, Raiffeisen invested heavily in complying with the US Foreign Account Tax Compliance Act (FATCA), the Qualified Intermediary (QI) requirements, preparing for the automatic exchange of information (AEOI), complying with the changed anti-money laundering regulations, and conforming to the Swiss Financial Market Infrastructure Act (FMIA), the Financial Services Act (FinSA) and the Data Protection Act (DPA).
As a member of the Coordination Domestic Banks (CDB), Raiffeisen is particularly involved in the Federal Financial Services Act (FinSA) and tax compliance strategies in and outside Switzerland.
The Raiffeisen Group endeavours to avoid compliance risks by actively monitoring legal requirements and adapting internal policies and processes to new requirements as promptly as possible. Where necessary, modern IT tools are used in support of relevant measures. In addition, the various compliance teams – via a "blended learning" approach – invest substantially in training and raising the awareness of staff and management at all levels.
Assessment of the risk situation – legal and compliance risk
The risk situation in 2017 was accentuated by high regulatory pressure and increased public perceptions of violations and/or misconduct. Raiffeisen counters these risks by proactively monitoring legal developments, complying with requirements through projects and providing regular employee training.