Credit Risk Management Santander Brazil

Transcription

1 Credit Risk Management Santander Brazil Abril/2010 1

2 Contents Objectives and scope... 3 Organizational structure... 3 Credit and Market Risks Estructure: first and second level... 3 Mission, principles and objectives... 4 Principles of risk management... 4 The keys to achieve the mission are:... Error! Bookmark not defined. Risk Department s activities... 6 Management, governance and risk planning:... 6 Retail Risks:... 6 Wholesale: Big and Large Companies (Global and Local relationship)... 6 Control, methodology and systematics of market risks... 6 Solvency Risks... 7 Environmental and Social Risk... 7 Collections... 7 Credit Cards Risks and Consumer Financial Risks (Aymoré)... 7 Credit risk Management... 9 Definition... 9 Segmentation Segmentation: wholesale and retail Management model description Pre Sale Pós venda... Error! Bookmark not defined. Employees Training Income structure Transparency

3 Objectives and scope This report presents the principles and basic rules for credit risk management at Bank Santander (Brazil) S.A. ("Bank") and other financial institutions and similar authorized to operate by the Central Bank of Brazil members of Santander Brazil Group. This document will be reviewed and updated annually. Organizational structure According to the Central Bank of Brazil (Resolution 3,721), the Bank, as a leading institution in Santander Brazil Group has a single component responsible for managing credit and market risk. In the Bank's organizational structure, the Risk Management is represented by independent from business Vice Presidency, who reports directly to the Presidency. According to the concept of Santander Group, the structure in Brazil also reports for the matrix global Risks department located in Madrid (Spain). Credit and Market Risks Estructure: first and second level Credit and Market Risk Executive Vice President Risk Management & Governance Functional report CIO Governance & Regulation Risk Planning Methodology & Control Implementation & Integration Solvency Risk Market & Methodology Risk GB&M Corporate & Companies Credit Recovery Environmental Risk Risco Varejo GSB. Retail Real. Retail Santander. Aymoré. Cartões ( functional report) 3

4 Mission, principles and objectives Santander recognizes that Risks is essential for the business management through analysis and decision, showing the importance of an adequate approach to protect the bank s business, and enable the management the appropriate treatment of risk as one vectors of creating value. Santander s risk policy is focused on maintaining a lowmedium and predictive profile in all risks. Principles of risk management Involvement of senior management. The Board s Risks Committee, the Senior Management Committees and the Group s units are structured in such a way as to involve management in global supervision of risk taking. Independent working from the business areas: In the Bank's organizational structure, the Risk Management is represented by independent from business Vice Presidency, who reports directly to the Presidency of Santander Brazil. Collective decision making (including at the branch level) which ensures a variety of opinions and does not make results dependent on decisions solely taken by individuals. Joint responsibility for decisions on credit operations between risk and business areas. Defining functions. Each risk taker unit and, where appropriate, risk manager has clearly defined the types of activities, segments, risks in which they could incur and decisions they might make in the sphere of risks, in accordance with delegated powers. How risk is contracted, managed and where operations are recorded is also defined. Risk measurement. This considers all the risk positions taken throughout the business perimeter and uses the basic measures in the components and dimensions of risk, in the whole life cycle, for the management at each moment. Limiting risks. The aim is to limit, efficiently and comprehensively, the maximum risk levels for the various risk measures, so that the risks incurred are known and the necessary infrastructure exists for their management, control and information, so as to guarantee that undesired types of risk will not be incurred and capital consumption on the basis of risk, the exposures and the losses will never exceed the maximum levels approved. Setting policies and risk procedures. The policies and procedures constitute the basic regulatory framework, articulated through circulars and operating rules which regulate risk activities and processes. Defining and assessing risk methodologies. The methodologies provide the definitions of internal risk models, applied by the Group, and, so, require risk measures, methods for evaluating products, methods for constructing interest rate curves and market data 4

5 series, calculations of capital consumption on the basis of risk and other risk analysis methods, as well as respective calibration and testing. Management and control of risks at Santander is structured around the following phases: Establishment of risk management frameworks and policies which reflect the principles and standards for the general functioning of risk activities in Grupo Santander, based on a corporate risk management framework which embraces the organisational model and the management model, as well as a series of more specific corporate frameworks of the functions under the General Directorate of Risks. At the local level, the risk units incorporate the corporate rules to their internal policies and develop the corresponding procedures in order to: Identify risks by constantly reviewing and monitoring exposures, assessing new products and analysing particular operations. Measure risks using methodologies and models that have been put in use after a process of validation and approval. Formulate the Group s appetite for risks by setting global and specific limits for the different types of risks, products, customers, groups, sectors and geographic areas. Draw up and distribute a complete series of reports, which are reviewed on a daily basis by those responsible for the management of Santander at all levels. Execute a system of risks control, which verifies every day the extent to which Santander s risks profile is in line with the risk policies approved and the limits established. 5

6 Risk Department s activities Management, governance and risk planning: Responsible for ensuring the existence of a local basic regulatory framework adapted to global and local regulatory requirements, promoting the adequacy of internal procedures facing the changes published by regulators. Support the Risk s departments in internal and external audits. Defining and implementing the governance and organizational risks models. responsible for the management of entire risk budget Manages and promotes the training of employees through the school of risks. Retail Risks: The area develops, implements, monitors and reviews the policies, strategies and processes of Retail Credit Risks. Approve annually the Credit management programs(pgc²) for retail credit products. Prepare studies for decision making for retail credit products. Santander Analytics are a global department who acts as the provider in the development and monitoring of statistical models, within the global quality standards of Santander Group, which assist in automatic credit decision making. This department reports direct to the Global Office. Wholesale: Big and Large Companies (Global and Local relationship) The area is responsible for analyzing, admission and monitoring corporate clients risks. This department is also responsible for designing, implementing and maintaining policies, credit risk management, systematic and complex derivatives analysis. Control, methodology and systematics of market risks Approval of products, limits and structured operations for market risk exposures, either structural or trading; Control of limits, regulatory capital and Interest rate risk; Control of economic and regulatory risk capital in structured products, portfolios of volatility, special operations/limits, management of assets and liabilities (ALM), Sovereign Risk and Cross Border Risk. 6

7 Pricing model validation who includes the approval of methodological definition and process; Methodology development and approval for ALM models; Modeling credit risk for the Wholesale segment. Methodological definition, process approval and validation of pricing models Development and approval of methodology for ALM models Credit risk modeling for Wholesale segment. Development and support for methodological tools of market risk. Calculation of trading book economic result and P&L reserve. Solvency Risks Control and monitoring of budget, portfolio goals and also needs to be the source of financial information for the entire the department. Ensure the process of definition and implementation of the credit risk objectives, providing dashboards, reports, business and credit risk portfolio analysis. In addition, is responsible for the implementation of regulatory reports (Brazil, Spain and IFRS). The department is also responsible for advanced metric development and coordination, like Basel II. Environmental and Social Risks A specialized team of biologists and geologists monitors the customers environmental practices, and a team of financial analysts studies the likelihood of damages that unfavorable environmental conditions may cause to its customers financial condition and collateral, among other effects. Santander s monitoring activity focuses on preserving its reputation in the market. Collections Santander s collections department uses tools such as behavior and collection scoring to study the collection performance of certain groups in an attempt to lower costs and increase recoveries. Customers likely to make payment are classified as low risk, requiring less aggressive strategies to ensure payment, and more attention is paid to maintaining a healthy customer relationship. Customers unlikely to make payment are classified as high risk and contacted consistently regarding payment. All customers with past due amounts or whose loans have been rescheduled or otherwise restructured face strict internal restrictions. Credit Cards Risks and Consumer Financial Risks (Aymoré) Santander s understands that Credit Cards and Consumer Financial are very dynamic markets. According to a global model, these risks departments are direct connected to the business strategy. Both departments develops, implements, monitors and reviews the policies, strategies and processes, reviewing and approving each year, the Credit Management 7

8 Program. In Santander s model governance both departments works under the Group Santander policies, including a functional report to Risks Vice President. 8

9 Credit risk Management Definition Santander understands the credit risk as the possibility of losses associated with the failure by the borrower or counterparty to their respective financial obligations under agreed upon, the devaluation of the credit agreement arising from the deterioration of the risk rating in the borrower's, reducing the profit or remuneration, the benefits granted in the renegotiation and costs of recovery. Santander s credit risk definition also includes: the counterparty credit risk, understood as the possibility of non compliance, for certain counterparty obligations relating to the settlement of transactions involving financial trading assets, including those relating to liquidation of derivative financial instruments; the country risk, understood as the possibility of losses associated with the failure to contractual financial obligations in accordance with the case by borrower or counterparty located outside the country, due to actions taken by the Government of the country in which it is the policy holder or counterparty; the risk transfer understood as the possibility of barriers in the currency exchange of values received; the possibility of disbursements to honour guarantees, sureties, commitments credit contracts or other transactions of a similar nature; and the possibility of losses associated to the failure of contractual financial obligations in accordance with the case by the intermediate 9

10 Segmentation The risk model of Santander works with three kinds of credit decision as follows: Standardized clients: individuals and companies not classified as individualized clients. The management of these risks is carried out using automated decision making and internal risk assessment models, complemented by teams of specialist analysts whenever the model lacks scope or precision Individualized clients: clients from the wholesale bank, financial institutions and certain companies. Risk management is carried out by an analyst, established in accordance with the risk undertaken, and complemented by support tools for decision making based on internal risk assessment models; Standardized and individualized: the decision may be taken based on pre approval, following Credit and Behavior Score models, or traditional analysis, in order to make a decision, within predetermined authority levels. Segmentation: wholesale and retail Customers of the Wholesale segment are divided into three business segments (according to annual revenues). The segments are companies with global relationship with Santander, big companies but without global relationship and mid sized companies. The commercial and risks segmentation are the same. All the credit decisions for Wholesale Customers are collegiate, in other words, this point means that each clients of this segment have a dedicated analyst. Retail customers are divided as individuals, micro/small companies and Aymoré. Individual and companies segments works with all Santander s credit models (Automatic or individual analysis). In an ascending line, in accordance to the customer s income for individual and annual revenues for companies, the decision process will be less automatic and more individual. Is important to say that Aymore s business are segmented by the kind of product (cars, trucks, tourism and others) 10

11 Management model description Santander holds a global view of the bank s credit portfolio throughout the various phases of the risk cycle, with a level of detail sufficient enough to be able to assess current risks and eventual shifts. This mapping is monitored by the Board of Directors and the Risk Committee, which establish the risk policies and procedures, the limits and delegation of powers, in addition to approving and supervising operations of the sector. The management process consists of identifying, measuring, reviewing, controlling, negotiating and deciding upon the risks incurred in the bank s operations. This cycle is made up of three distinct phases: Pre Sale Sale Post Sale Processes of planning, target setting, risk assessment by the bank, approval of new products, risk analysis and the credit rating process and limit setting. Decision making phase for pre classified and specific transactions. Processes of risk monitoring, measurement and control, and recovery process management. Pre Sale Objectives Setting The start point of this process is the bank s estimated growth based on commercial area studies. This studies looks for each segment, product or business line in accordance to the Santander s strategy. The risk department evaluates these numbers and based on other portfolio indicators calculates the expected delinquencies. This analysis is independent and is the main source for strategy business decisions. These objectives are monthly reviewed by risks specific reports. New products The new products policy is defined by the Santander compliance department and involves not only the products department. All products needs the approval of financial, organization, compliance and legal department. The credit risks approval is basic condition where applicable. A Santander value is collegiate decisions, so, without the approval of these five departments a credit product will not release. 11

12 Planning risk limits This is the process that identifies the bank s interest by means of the assessment of business proposals and risk position. This process is defined in the global risk limit plan, an agreed upon document for the integrated management of the balance sheet and the inherent risks. The limits are based on two basic structures: clients/sectors and products. In the case of individualized risks, clients represent the most basic level, for which individual limits are established (pre assessment). For large corporate groups a pre assessment model based on an economic capital measurement and monitoring system is used. As regards the corporate sector, a simplified pre assessment model is applied for clients that meet certain requirements (thorough knowledge, rating, etc). In the case of standardized client risk, the limits are planned using credit management programs (PGC), a document agreed upon by the areas of business and risk, and approved by the risk committee or its delegated committees. This document contains the expected results for the business in terms of risk and return, in addition to the limits the activity is subject to and the related risk management. Main assignments of Risks Executive Committee Risk analysis o Monitoring and analysis results analysis the deviations from planned expectations and proposed action plans to reach the objectives. o Approves the maximum performance milestones for each credit portfolio by segment or relevant product. Risk analysis is a pre requisite for the credit approval to clients and consists of examining the counterparty s ability to meet its contractual commitments to Santander, which includes analyzing the client s credit quality, its risk operations, its solvency, the sustainability of its business, and the expected return taking the risk undertaken into account. This analysis is carried out at preset intervals or whenever a new client or transaction arises. In addition, the rating is analyzed whenever the warning system is triggered or an event occurs affecting the counterparty/transaction. Environmental and Social Risks The Santander s environmental objective is to persuade corporate and private banking clients to engage in sustainable practices. Santander adopted an inclusive stance with an emphasis on solutions for changes in attitude. Santander analyzes the social and environmental issues of clients with a relevant credit limit and in the acceptance of new account holders and investments. The experience shows that there is a frequent connection between social and environmental problems and financial issues. Companies that take care of the well being of their employees and of the environment 12

13 they work in tend to have more efficient management and therefore more chance of honoring their commitments and generating good business for the bank. Sale Decisions on operations The decision making process on operations aims to review them and adopt solutions, consideration the interest risk and any important elements of the operation to optimize profits and losses. The Retail decision process may take the form of pre approval, by using Credit and Behavior Score models, whereby amounts are made available in accordance with the customer quality and repayment ability or, to a lesser extent, by using traditional approval methods, where the manager reviews the customer and the proposed teal in order to make a decision, within predetermined authority levels. At Wholesale segment the process is based on the stipulation of maximum limits to customers, while business proposals are submitted to committees, in accordance with established authority levels. Decisions beyond local authority levels are escalated to a superior Credit Committee. Post Sale Risk monitoring and control The Executive Vice Presidency for Risk has a specialized risk monitoring area for the control of credit quality, formed by local and global teams to which specific managers and resources have been assigned. This monitoring area is based on an ongoing process of observation, which ensures the early detection of any events that might arise in the development of risk, the transactions, the clients and their environment, so that preventive action may be taken. Santander has a system called Companies in Special Watch (FEVE) which identifies four levels on the basis of the degree of concern arising from the circumstances observed (extinguish, secure, reduce, monitor). The inclusion of a company in FEVE does not mean there have been defaults, but rather the advisability of adopting a specific policy toward that company and establishing the period for it. Clients in FEVE are reviewed at least every six months, and every quarter for the most serious cases. A company can end up in special watch as a result of monitoring, a review conducted by internal auditing, a decision of the person responsible for the company or the entry into functioning of the system established for automatic warnings. In relation to standardized client risk, the key indicators are monitored in order to detect any variations in the performance of the credit portfolio, with respect to the forecasts made in the credit management programs. The monitoring is based on a continuous process of permanent observation, which enables incidents to be detected in advance in the evolution of risk, operations, customers, and their 13

14 environment in order to take steps to mitigate them. The monitoring is conducted on the basis of customer segmentation. Solvency Committee The main subjects are the macroeconomic perspective, product analysis and portfolios behaviors. One of the main the focus is the implementation objectives, correct the deviations from then and reach opportunities to optimize the profit and losses relation. Risk Control Its function is to obtain a global view of the bank s credit portfolio throughout the various phases of the risk cycle, with a level of detail sufficient enough to be able to assess the current circumstances and eventual shifts. Changes to the bank s risk exposure are controlled in an ongoing and systemic manner according to budget, limits and benchmarks. The impacts of these changes in certain future situations, both those of an exogenous nature and those arising from strategic decisions are assessed with the aim of establishing measures that place the profile and the amount of the credit portfolio within the parameters established by the bank. Provisions Solvency risk is responsible, among other activities, for ensuring that the losses associated with credit risk are properly ascertained or estimated and adequately provisioned according to resolution No. 2,682 from Central Bank of Brazil (BACEN), and IAS 39 for IFRS publications. This function also handles provisioning in accordance to the rules of the Bank of Spain (BdE). Capital The process of managing, monitoring and control of capital is accomplished for regulatory and economic capital. The regulatory capital management is based on the analysis of the adequacy of capital levels through Basel index using the criteria defined by the Central Bank of Brazil. The objective is to achieve an efficient capital structure considering capital costs, regulatory requirements, goals of rating and return to investors. Recovery/Collections The strategies and channels for collection are established in accordance with the number of overdue days and the amount of the debt. A responsibility map is then drawn up. During the first few days of delinquency, a more intensified collection model is adopted, employing specific strategies and closer internal monitoring. Service centers, credit blacklisting, and collection by mail and through the branch network are the methods used by the branch network during this phase, all aimed at client recovery. In cases of delays of over 60 days and more significant amounts, internal teams specializing in credit restructuring and recovery enter into action, operating directly with the delinquent clients. Recovery of lesser amounts or more 14

15 serious delays is carried out by legal or administrative third parties, who are paid commission on any amounts recovered in accordance with internal criteria. Non performing loan portfolio, particularly write off transactions, is periodically sold through an auction process, in which the conditions and characteristics of the transactions are evaluated, without risk retention. Validation The credit cycle uses information systems and statistical models developed to give the tooling support to its functioning. Whole system passes by the functional specification, postdeployment follow up and approval, which is always made by independent area following predefined script. About the risks models classification, its approval for development and deployment, as well as monitoring, is made jointly by providers (Analytical Centre and Methodology) and users (Retail, wholesale, Risk Aymoré and cards), with the accompaniment of Solvency as the control area. There is also the involvement of Internal Validation area, outside and independent of the Credit Vice Presidency. The quality Monitoring of the model is done by models developers (retail and wholesale) from reports submitted to other risk areas and the validation department. The Models Committee ensures that decisions occur on a consensual and involving senior management. Systems certifications that support the credit models is performed by the external area as the same way described above. Statistical validation is a function of Validation department. This area has to validate all credit processes, systems, and models that will be working at the moment of Basel 2 implementation. The other control and validation areas are compliance, internal audit and internal controls (includes SOX). Risk is responsible for sending the evidences of process controls, as frequency set for each control, for the SOX. Employees Training Santander has a global model of corporate school in the risk department with a special focus on risks issues. This school presents a training schedule for each employee who works in the risk department. The trainings can be traditional (classroom) or e learning tools (bank s intranet). These schedules are constant revisited and updated. Income structure The Santander s income policy seeks to support the business strategy and ensure the business sustainable growth and profitability. 15

16 Transparency A summary description of the credit risk management structure is evidenced in a quarterly report published jointly with the financial statements. The Board of Directors of Santander is responsible for the information exposed in both reports. 16

17 Notes (1) the Santander list of conglomerate members can be found at National financial system > > accounting cadastral Information > > registration of institutions. For the purposes of Resolution 3,721 from Central Bank of Brazil, should be considered only credit companies registered. (2) PGC is the abbreviation for Credit Management Program. These documents consolidate the main rules and define the operational limits for the portfolio, by product family. Are designed for retail products, Cards and Aymoré. Show detailed views of sales strategy, key features of the credit line, market share, summary of financial impacts and strategies for admission, maintenance and credit recovery. Its purpose is to define a plan both aligned with the goals of business growth and the Risk provision budget. Are approved by the Executive Committee for Brazil, which is the maximum forum for matters of Credit in Brazil. (3) The Cia de Crédito, financiamento e Investimento RCI Brasil has structure of admission with autonomy, but all the decision are coherent to the Santander Brazil credit policies. The risk assessment tools, systems and processes are the same of Aymoré. 17