IFC s Approach to Risk INTERNATIONAL BANKING FORUM 2011 Brescia, 16-17 June 2011 Vittorio Di Bello Chief Credit Officer IFC World Bank Group
Agenda IFC: Who we are, What we do IFC and Sustainability IFC and Approach to Risk Conclusion 2
IFC, is the main driver of private sector development in the World Bank Group Vision People should have the opportunity to escape poverty and improve their lives. IBRD IDA IFC MIGA ICSID Financial Institution with Development Goals; Promote and support economic growth by catalyzing private sector investment in developing countries; Largest and only global multilateral source of debt and equity financing for private enterprise in developing countries. 3
IFC s Business IFC s business consists of three complementary pillars that support its mandate and strategic priorities. Investment Services Advisory Services Asset Management Loans for IFC Account Equity and quasiequity finance Other Forms of financing Access to finance Corporate advice Infrastructure advice Wholly owned subsidiary of IFC Private equity fund manager Invests third-party capital alongside 4 4
Example: IFC s Approach to Equity Investments IFC equity ownership is typically limited to 20% IFC does not operate companies IFC invests as a minority shareholder Choosing right, getting in early Significant returns achieved by IFC (e.g. telecom and banking Realizing full value on exit Adding value through debt IFC has a long-term investment horizon. Selecting winners when markets are tough Full range of financial products 5 33
IFC s Balance Sheet Overview (As of June 30, 2010) (In US$ billions) ASSETS LIABILITIES AND CAPITAL Liquid Assets (gross) $29.93 Borrowings $31.11 Loans and Equity Investments $25.94 Payables and Other Liabilities $11.61 (net of $1.35 in reserves) Net Loans: $16.66 Net Worth $18.36 Equity Investments: $7.47 Paid in Capital: $2.37 Debt Securities: $1.82 Retained Earnings: $14.79 Receivables and Other Assets $5.20 Accumulated Other Comprehensive Income: $1.20 Total Assets $61.08 Total Liabilities and Capital $61.08 6
Net Income (As of June 30, 2010) 3 Net Income 2,5 2 Asian & Russian Crisis Brazil Crisis Argentina Crisis & Turkey Crisis Argentina Recovery & EM Growth Global Financial Crisis (US$ billions) 1,5 $200 1 0,5 0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10-0,5 Net Income (before grants to IDA) 1 Net Income (after grants to IDA) 7
IFC Disbursed Portfolio (As of June 30, 2010) Breakdown of IFC Total Investment (gross of $1,349 mn reserves) 30 Portfolio Holdings (US$ billions) 25 20 15 7% 29% 10 5 64% 0 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Debt Securities Equity Investments Loans 8
Disbursed Portfolio Distribution (As of June 30, 2010) IFC has diversified exposure in 103 countries and 1,656 companies. Information Chemicals 4% Nonmetallic 3.5% mineral product manufacturing 3.8% Food & beverages 4% Breakdown by Industry Agriculture & forestry 3.3% Industrial & consumer products 3.4% Other 16.2% Breakdown by Geographical Middle East and North Africa 9% Sub-Saharan Africa 8% Europe and Central Asia 28% Transportation & warehousing 5.9% Oil, Gas & Mining 7.8% Utilities 12% Finance & Insurance 36.1% Asia 26% Latin America and Caribbean 29% 12% 10% 8% 6% 4% 2% 0% 10% 7% 6% 6% 5% India Brazil China Russia Turkey Top Five Exposures by Country as a % of Total Committed Portfolio (FY10) 9
10 IFC and Sustainability
WHAT WE MEAN BY SUSTAINABILITY Four dimensions of good business performance: Financial sustainability; Economic sustainability; Environmental sustainability; Social sustainability. 11
Environmental and Social Sustainability is Central to the IFC Mission Pioneer of socially and environmentally responsible investments 68 leading financial institutions from 28 countries have adopted the Equator Principles as of August 2010, accounting for nearly 95 percent of project finance transactions worldwide. Strong environmental and social due diligence Environment & Social Staff Project Categories Exclusion List IFC s Equator Principles are widely adopted by financial institutions 12
Why IFC Focuses On Sustainability Sustainability is one of IFC s five core strategic priorities. Key drivers: Accountability to shareholders Response to external stakeholders Strategic priorities Correlation of credit and environmental risk 13
Example: Credit risk positively correlated with environmental risk Env & Social Risk Rating (ESRR) score 1 (very low risk) 8% IRR (equity investments) 2 4% 3-1% 4 (very high risk) -31% 14
15 IFC s Approach to Risk
General Architecture of Risk Management Risk Governance Policies, Processes, Practices Reputational, Legal and Strategic Risks Capital Adequacy Credit Risk Market, Liquidity and ALM Risk Operational risk People, Training, Culture 16
17 Risk Management Framework
Risk, Conventional vs IFC Risks, Conventional Credit Finance Operational Risks, IFC Strategic Reputational Role Additionality Development Impact Environmental And Socia 18
On-Site Appraisal of Client Process: Multi-disciplinary team including investment officers, sector specialist, engineers, social environment specialist, legal, governance specialist, as applicable Review operations in the field Review operational, legal, financial, environmental & social, and other risks Review client s management, sponsors, organizational structure and performance Reputational Risk is Assessed Measured and Monitored TROUGHOUT THE ENTIRE PROJECT CYCLE Hold initial structuring/term sheet discussion with client A detailed Loan Portfolio Review is conducted for Fis. 19
Conclusion IFC is a Financial Institution with Development Goals Sustainability is a key strategic factor IFC s Risk Management supports and in the meantime it is shaped by our Mission and Strategy. 20