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.
Development of loans and provisions
Raiffeisen Group lending by client segment
Raiffeisen's main credit risks arise from transactions with collateralised loans to private individuals, commercial banks, and corporate and public-sector clients. Raiffeisen Switzerland monitors, controls and manages risk concentrations within the Group, especially for groups of affiliated counterparties and sectors.
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. Loans are generally granted on a secured basis.
Loans by collateral and property type
Raiffeisen's core business includes the financing of real estate, particularly residential property.
Credit policy in the corporate client business
The Raiffeisen Group seeks to serve corporate clients with low- to moderate-risk 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 sectors (corporate clients and other clients)
The real estate sector accounts for the largest share of lending to corporate clients and other clients. Most of these loans are secured by mortgages. The loans in the other sectors are broadly diversified.
Active country risk management
As stipulated in the Articles of Association, Raiffeisen Switzerland's 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. Raiffeisen Switzerland's Central Bank department, including Raiffeisen Switzerland B.V. Amsterdam, and its Corporate Client department can enter into commitments abroad. These commitments are limited and monitored on an ongoing basis. The highest country limits apply to countries with very good ratings.
Breakdown by country limit
Credit portfolio analysis and assessment
The Board of Directors of Raiffeisen Switzerland is periodically apprised of the analyses and assessment of the quality of the Raiffeisen Group's credit portfolio. The analyses focus on information about changes in the risk situation, limit compliance, measures taken, and the structural and qualitative features of the credit portfolio. The impacts of extreme macroeconomic difficulties on the credit portfolio are also monitored.
Measuring credit risk
The credit risk of each individual counterparty is measured using the following parameters:
- –Probability of default
- –Credit exposure at the time of default
- –Value of the collateral
The core element of credit risk measurement is the rating system, which is developed and monitored by Raiffeisen Switzerland's Risk & Compliance department. The rating system is used to assess clients' creditworthiness. 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.
Assessment of the risk situation – credit risk
Credit growth is consistent with the strategy and characterised by low risk intensity overall. Lending is conservative overall and normally 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 flats 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 overall 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 primarily exposed to interest rate risks and foreign currency risks. Risks associated with fluctuating interest rates arise due to the Raiffeisen Group's significant positioning in interest operations and represent a major risk category. They are actively managed and monitored within authorised risk limits.
Clear guidelines and limits apply to the management of interest rate risks within the Raiffeisen Group – both for the Group as a whole and for individual legal entities. Risks are managed autonomously within this corridor by the individual legal entities, i.e. the Raiffeisen banks and Raiffeisen Switzerland. Risk managers have a proven set of risk management tools, including tools to simulate interest rate developments and assess their impact. Raiffeisen Switzerland's Central Bank department provides advice on asset and liability management within the Raiffeisen Group. None of the other Group companies assume any material risks associated with fluctuating interest rates.
The Risk & Compliance department 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 of changes in market interest rates on interest income. Interest-driven value-at-risk is also calculated in order to monitor the overall risk situation at various levels within the Group.
A greatly expanded interest rate risk disclosure, as set out in FINMA Circular 2016/01 "Disclosure – banks", will be provided for the first time as of 30 June 2019.
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 remaining foreign currency risk in the banking book is managed by Raiffeisen Switzerland's Central Bank department within the limits that the Board of Directors has allocated to it.
Risks in the trading book
Of the entities within the Raiffeisen Group, only Raiffeisen Switzerland's Central Bank department runs a trading book. Raiffeisen Switzerland B.V. Amsterdam's structured products business is also allocated to the trading book.
The Central Bank department's trading risks are strategically limited by using global limits. Risks are operationally limited by sensitivity, position and loss limits, and value-at-risk limits. Netherlands-domiciled Raiffeisen Switzerland B.V. Amsterdam 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 bond portfolio, which consists entirely of investment-grade debt securities, entails credit spread risks.
All traded products are depicted and assessed in a risk management system. This enables trading book risks to be efficiently and effectively assessed, managed and controlled. The Risk & Compliance department monitors positions and market risks on a daily basis using market data and risk parameters that are independently checked for accuracy. Before new products are rolled out, the Risk & Compliance department performs an independent evaluation of the risks.
Raiffeisen Switzerland: Limits in the Central Bank trading book
Raiffeisen Switzerland: Holdings in the Central Bank trading book
Assessment of the risk situation – market risk
Market risks mainly result from the risks associated with fluctuating interest rates in the banking book. The potential declines in value and loss of earnings are acceptable even in adverse scenarios involving interest rate shocks and stresses.
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.
Raiffeisen Switzerland's Central Bank department centrally manages liquidity risk for Raiffeisen Switzerland and the Raiffeisen Group based on regulatory requirements and internal targets.
The regulatory liquidity requirements apply on a consolidated basis at Raiffeisen Group level, and at an individual institution level to Raiffeisen Switzerland. The individual Raiffeisen banks are exempted from compliance with regulatory liquidity requirements but still meet internal liquidity requirements.
Raiffeisen Switzerland's Central Bank 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 Central Bank department manages Raiffeisen Switzerland's cash reserves, facilitates the Group's access to money and capital markets, and ensures these refinancing sources are adequately diversified. It performs regular stress tests and assesses liquidity trends in the Raiffeisen Group on an ongoing basis, taking regulatory and economic requirements into consideration. The Risk & Compliance department independently monitors liquidity risk.
Assessment of the risk situation – liquidity risk
The Raiffeisen Group's liquidity situation is sound thanks to its focus on the domestic savings and mortgage business. Due to its low degree of dependence on major clients and broad diversification among private clients, its funding sources are minimally concentrated. Loans to clients are funded largely by customer deposits (88.6%) and additionally through central mortgage institution loans and Raiffeisen bonds. The money market is used solely for tactical management of the liquidity buffer. This maximises the immunisation against risks on the money market.
Operational and business risks arise in two ways: as a consequence 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 analysis of the operational risks is supplemented by an assessment of the qualitative impact of a given risk event.
The Raiffeisen Group carried out extensive operational risk assessments, as it does every 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.
Information security – a discipline focused on data confidentiality, integrity and availability – is becoming increasingly important. Cybercriminals pose the biggest threat in this regard. Other players, including states, politically motivated hacktivists and employees intent on committing fraud, play a comparatively minor role. 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 and personal data.
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, regulatory and internal 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 and the Raiffeisen banks.
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 risks are well within the risk budget defined by the BoD overall. The 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.
Migrating to the new core banking solution has eliminated the risk associated with the developmental inflexibility of the previous solution.
Last year, individual client were affected by the misdelivery of bank documents. The measures needed to avoid a recurrence have been identified and taken. Otherwise, no serious violations of client privacy or data protection were identified.
Legal and compliance risk
The Risk & Compliance department reports to the Executive Board and the Audit and Risk Committees of the Board of Directors of Raiffeisen Switzerland on major compliance risks quarterly and on legal risks semi-annually. This reporting also includes an overview of the legal and compliance risks of 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 Risk & 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. Risk & Compliance 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 regulations 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 put them in concrete form.
- –Developments in the cross-border business are constantly monitored and analysed. While doing so, Raiffeisen systematically pursues a passive service provision approach. This approach requires all activities to be initiated by the client and all legally relevant actions to be performed in Switzerland. Raiffeisen banks and branches are prohibited from carrying out any activities outside of Switzerland, especially client-related trips abroad.
- –Raiffeisen pursues a rigorous tax compliance strategy.
- –Market conduct rules are adhered to, as are the resulting due diligence and advisory obligations.
- –Data is protected and bank-client confidentiality ensured.
- –Raiffeisen is committed to fair competition and its actions are guided by strong ethical principles.
In the current year, the Raiffeisen Group invested heavily in implementing the provisions of the Financial Market Infrastructure Act (FMIA) and the Financial Services Act (FinSA), conforming to modified anti-money laundering regulations and the Data Protection Act (DPA), complying with the US Foreign Account Tax Compliance Act (FATCA) and Qualified Intermediary (QI) requirements, and executing the automated exchange of information (AEOI).
As a member of Coordination Domestic Banks, an interest group, Raiffeisen Switzerland is particularly involved in the Federal Financial Services Act (FinSA) and withholding tax optimisation (adoption of paying agent system). The governance structure was also reviewed and optimised.
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 2018 was accentuated by high regulatory pressure and increased public perceptions of violations and/or misconduct. The Raiffeisen Group counters these risks by proactively monitoring legal developments, complying with stricter requirements, regularly training employees, and providing management and control.