Pillar III 2014 Gjensidige Bank Holding AS Gjensidige Bank Holding Group
Contents 1. Introduction 3 2. Capital adequacy regulations 3 2.1 The introduction of CRD IV 4 2.1.1 Liquidity requirements 4 2.1.2 Reporting requirements 4 3. Group matters and consolidation 4 3.1 Overview of the Gjensidige Bank Holding Group 4 3.2 Restrictions on the transfer of capital or repayment of debt between companies in the same Group 4 4. Primary capital and capital requirements 5 4.1 Primary capital 5 4.2 Capital requirements 6 4.2.1 Leverage ratio 6 5. Management and control of risk in Gjensidige Bank ASA 7 5.1 Risk management and internal control 7 5.2 Process for assessing risk exposure and capital (ICAAP) 8 5.2.1 Capital Pillar II 9 6. Credit risk 9 6.1 Management and control of credit risk 9 6.2 Portfolio overview 10 6.2.1 Total commitment amount by type of commitment 10 6.2.2 Loans divided by geographic area 10 6.3 Defaults and write-downs of loans 10 6.3.1 Loans past due 10 6.3.2 Group write-downs on the balance sheet 11 6.3.3 Change in individual write-downs in the period 11 6.3.4 Change in group write-downs in the period 11 6.3.5 Gross loans and write-downs by risk groups 11 6.4 Counterparty risk 11 7. Market risk 12 7.1. Equity positions outside the trading portfolio 12 8. Operational risk 12 9. Other risks 12 9.1 Liquidity risk 12 9.2 Business risk 13 2 Gjensidige Bank Holding AS and Gjensidige Bank Holding Group Pillar 3 2014
1. Introduction Pillar 3 of capital adequacy regulations defines requirements for the disclosure of financial information. This document is updated annually and meets the information disclosure obligations (requirements) of Gjensidige Bank Holding (AS/Group) pursuant to these regulations. Updated information on capital requirements and capital is disclosed in the quarterly report. For further details see www.gjensidige.no. The purpose of this document is to describe methods used for calculating capital for credit risk, market risk and operational risk under Pillar 1. Further, the document also discloses internal methods used for reporting and management of risks under Pillar 2. Gjensidige Bank Holding AS is a wholly owned subsidiary of Gjensidige Forsikring ASA and holding company for Gjensidige Bank ASA. Gjensidige Bank ASA is a wholly owned subsidiary of Gjensidige Bank Holding AS. Gjensidige Bank Boligkreditt AS is in turn a wholly owned subsidiary of Gjensidige Bank ASA. Gjensidige Forsikring ASA At the end of 2014, Gjensidige Bank Holding Group had total assets amounting to NOK 29.5 billion and the result before taxes was a profit of NOK 254 million. The bank offers mortgages, car financing, unsecured loans, debit and credit cards and current accounts, mainly to consumers and agricultural customers. At the end of the year, 86.0 per cent of the bank s lending to customers was secured by a mortgage on residential or agricultural property. Some part of the lending portfolio consisted of unsecured lending. This portfolio has a higher return correlated to credit risk level in the portfolio and a significant share of bank losses are related to this portfolio. Unsecured lending portfolio has good profitability. Main risk in the Group is credit risk. Gjensidige Bank Group aims to comply with the prevailing requirements for the buffer capital. Capital adequacy ratio of Gjensidige Bank Holding Group was 15.8 per cent at the end of 2014. 2. Capital adequacy regulations In June 2013 EU adopted the new regulations for credit institutions and investment firms, CRD IV (Capital Requirements Directive IV) that was made effective from 1. January 2014. The rules consist of a directive and regulation and are mainly based on the Basel Committee's capital and liquidity standards (Basel III). CRD IV is not yet included in the EEA agreement. In Norway, the corresponding rules are introduced incrementally. CRD IV requirements for capital and buffer came into force 1. July 2013 by amendments to the Financial Institutions Act and the 100% Gjensidige Bank Holding AS 100% Gjensidige Bank ASA 100% Gjensidige Bank Boligkreditt AS Securities Act. Legal changes in capital adequacy regulations became effective 1. September 2014. The other parts of the capital adequacy rules are specified in the regulation no. 1506 dated 14. December 2006, Capital requirements for commercial banks, savings banks, finance companies, financial holding companies, securities companies and fund management companies, etc. (Capital Adequacy regulations). The regulations are built on three pillars: Pillar 1 Minimum requirements for capital adequacy Pillar 2 Assessment of the overall capital adequacy and supervisory review and evaluation (ICAAP) Pillar 3 Requirements for the disclosure of the financial information Pillar 1 Capital requirements Pillar 1 covers the regulatory minimum requirements for capital. The overall basis of calculation is the sum of the capital needs for credit risk, market risk and operational risk. Pillar 1 allows banks to apply alternative methods of calculation. Some of these methods require prior approval from the Financial Supervisory Authority of Norway (Finanstilsynet). Gjensidige Bank ASA applies the following methods for measuring various risks: Credit risk Market risk Operational risk Standard method Standard method Basic method Minimum requirement for total capital is equivalent to 8.0 per cent of total base and capital requirements conservation buffer (2.5 per cent) and systemic risk buffer (3.0 per cent). The rule for the countercyclical capital buffer was adopted in the autumn 2013. Countercyclical capital buffer is a variable capital requirement which normally should be between 0 and 2.5 per cent common equity depending on the economic situation. The buffer requirement was set by Norges Bank at 1.0 per cent with effect 30. June 2015. Buffer for systemically critical banks is required to be 1.0 per cent from 1. July 2015 and 2.0 per cent from 1. July 2016. The Ministry of Finance has approved regulations for systemically critical financial institutions on 12. May 2014. DNB, Nordea Bank Norge and Kommunalbanken were identified as systemically critical banks; hence Gjensidige Bank Holding AS is not directly affected by these requirements. Capital requirements 31.12.2014 30.6.2015 30.12.2015 Minimum Requirements 4.5 % 4.5 % 4.5 % Conservation Buffer 2.5 % 2.5 % 2.5 % Systemicrisk Buffer 3.0 % 3.0 % 3.0 % Countercyclical buffer 1.0 % 1.0 % Total core Tier 1 requirements 10.0 % 11.0 % 11.0 % Hybrid Tier 1 capital 1.5 % 1.5 % 1.5 % Additional capital (Tier 2) 2.0 % 2.0 % 2.0 % Total capital requirements 13.5 % 14.5 % 14.5 % The basis of calculation, the capital requirements, equity and subordinated loans are described further in Chapter 4. Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 3
Pillar 2 Assessment of overall capital adequacy and supervisory review Pillar 2 defines the requirements for the Banks' own processes for assessing risk and capital adequacy situation through Internal Capital Adequacy Assessment Process (ICAAP). Gjensidige Bank's process for assessing the risk profile and capital requirements is described in Section 5.2 of this document. Pillar 2 also provides guidelines for the supervisory review and evaluation. Pillar 3 Disclosure of information Pillar 3 defines the requirements for the disclosure of financial information. The purpose of these requirements is to ensure that market participants can evaluate the institutions' risk levels in the different areas, the way these risks are managed and the controls in as well as the institution's level of capitalization. It is required that this disclosure is made publicly available on the internet. 2.1 The introduction of CRD IV EU Commission has adopted a number of provisions in the Directive and Regulations and more detailed provisions are being prepared. FSA informs that such provisions will be followed up prudentially within the scope of the Norwegian legislation; they also inform in the circular about additional provisions that will be applied in the practice of the regulations. 2.1.1 Liquidity requirements To strengthen the banks' short- and long-term risk profile, the CRD IV introduces new quantitative liquidity and funding requirements. Minimum requirement of 60 per cent for short term liquidity indicator, Liquidity Coverage Ratio (LCR), will be introduced in October 2015. It is not yet decided that there should be a minimum requirement for the long-term liquidity indicator, Net Stable Funding Ratio (NSFR). Nevertheless, any such requirement is suggested to be effective from 2018. Reporting of LCR and NSFR figures has started in 2014. 2.1.2 Reporting requirements The reporting requirements specified in the technical standard of CRD IV came into force in 1. July 2014 and they apply for Norwegian credit institutions, financial companies and investment firms. 3. Group matters and consolidation 3.1 Overview of the Gjensidige Bank Holding Group Gjensidige Bank Holding Group consists of the following companies, in addition to the parent company Gjensidige Bank Holding AS: Companies that are fully consolidated - purchase method of accounting Name (NOK thousand) Number of shares Book value Ownership interest Percentage of voting rights Business office Type of business Gjensidige Bank ASA 876,000 1,613,884 100 % 100 % Oslo Bank Gjensidige Bank Boligkreditt AS 130,000 570,030 100 % 100 % Oslo Mortgage company 3.2 Restrictions on the transfer of capital or repayment of debt between companies in the same Group There are no contractual, legal or any other known restrictions on the transfer of capital between the companies in the same Group. Transfer of capital or repayment of debt between Group companies are regulated by current laws and regulations, and intercompany agreements. 4 Gjensidige Forsikring Bank Holding hittil AS i and år og Gjensidige fjerde kvartal Bank 2012 Holding Group Pillar 3 2014
4. Primary capital and capital requirements 4.1 Primary capital Gjensidige Bank Holding AS and Gjensdige Bank Holding Group have the following types of primary capital: NOK thousand Primary capital Gjensidige Bank Holding AS Gjensidige Bank Holding Group Share capital 1,037,520 1,037,520 Premium reserve fund 599,480 599,480 Other equity 3,184 401,893 Equity 1,640,184 2,038,893 Deductions Goodwill and other intangible assets (15,390) Value adjustments due to the requirements for prudent valuation (2,006) Core Tier 1 capital 1,640,184 2,021,497 Additional capital Subordinated loan capital 250,000 Primary capital 1,640,184 2,271,497 Capital adequacy Capital adequacy ratio 495.8 % 15.8 % Tier 1 capital ratio 495.8 % 14.1 % Core Tier 1 ratio 495.8 % 14.1 % Primary capital is NOK 2,271.5 million and core Tier 1 capital is NOK 2,021.5 million. Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 5
4.2 Capital requirements Minimum requirements for primary capital and buffer related requirements are presented in the table below. NOK thousand Gjensidige Bank Holding AS Gjensidige Bank Holding Group Calculation basis Capital requirements Calculation basis Capital requirements Minimum primary capital requirement Credit risk Of which: Institutions 327,841 26,227 54,436 4,355 Enterprises 169,530 13,562 Mass market positions 3,535,352 282,828 Positions secured by mortgage 8,632,121 690,570 Overdue positions 448,510 35,881 Covered bonds 68,766 5,501 Shares in securities' fund 32,037 2,563 Other positions 2,050 164 42,820 3,426 Total minimum requirement credit risk 329,891 26,391 12,983,572 1,038,686 Operational risk 943 75 1,094,928 87,594 CVA-risk 263,838 21,107 Minimum requirement for net primary capital 330,834 26,467 14,342,338 1.147,387 Buffer requirements Systemic risk buffer 3.0 % 9,925 430,270 Conservation buffer 2.5 % 8,271 358,558 Countercyclical buffer 0 % Total buffer requirement for core tier 1 capital 18,196 788,829 Available core tier 1 capital for buffer requirement 1,613,717 1,124,110 As of 31. December 2014 minimum requirement for net primary capital for Gjensidige Bank Holding Group was NOK 1,147.4 million. Primary capital is NOK 2,271.5 million. Hence, the Group has NOK 1,124.1 million available core Tier 1 capital for covering buffer requirements which in total accounted for NOK 788.8 million. 4.2.1 Leverage ratio Leverage ratio is calculated and reported according to the template from the Financial Supervisory Authority. Norwegian financial institutions can choose if they want to report leverage ratio as an average of monthly observations or at the end of the quarter until the 4th quarter 2017. At the end of the 4th quarter 2014, leverage ratio was 6.3 per cent for Gjensidige Bank Holding Group and 100.0 per cent for Gjensidige Bank Holding AS. NOK thousand Gjensidige Bank Holding AS Gjensidige Bank Holding Group Core capital 1,640,184 2,021,497 On-balance sheet 1,640,024 29,363,276 Derivatives 161,988 Off-balance sheet 2,544,460 Total exposure 1,640,024 32,069,724 Leverage ratio 100.0 % 6.3 % 6 Gjensidige Forsikring Bank Holding hittil AS i and år og Gjensidige fjerde kvartal Bank 2012 Holding Group Pillar 3 2014
5. Management and control of risk in Gjensidige Bank ASA All significant risks within Gjensidige Bank Holding Group arise as a result of operations in Gjensidige Bank ASA and Gjensidige Bank Boligkreditt AS. The activities of Gjensidige Bank Boligkreditt AS are consolidated in Gjensidige Bank Group. Risk management principles for the Gjensidige Bank Group (Gjensidige Bank) are defined below. The Board of Directors of Gjensidige Bank ASA has approved the Policy for risk management and internal control. The Board has also approved guidelines for Internal Capital Adequacy Assessment Process (ICAAP). 5.1 Risk management and internal control To ensure an effective and appropriate process for risk management, the internal control and capital management units in Gjensidige Bank ASA apply a framework of 10 principles: Strategic targets Organizational culture Organization Risk identification Risk analysis and stress tests Risk strategies Risk management and internal control Reporting, monitoring and surveillance Contingency plans Compliance Strategic targets Risk management is based on strategic targets and the bank's strategic business plan. Organisational culture In the process of risk management organizational culture is the foundation upon which all the other elements are based. The organisational culture includes management philosophy, management style and people in the organization with their individual characteristics such as integrity, ethical values and attitudes. A clear set of values and ethical guidelines are in place and well known throughout the organisation. Organisation Gjensidige Bank ASA is organized under one business area. Gjensidige Bank Boligkreditt has only one employee (CEO) and purchases services from Gjensidige Bank ASA. The responsibility for the bank's risk management: The Board is responsible for ensuring that the bank has adequate equity and subordinated loan capital in line with the bank's risk profile and regulatory requirements. The Board determines the risk appetite and approves the overall framework for the risk profile and capital adequacy. The Board also approves the overall framework for risk management, authorisations and guidelines for managing risks in the bank. The Board has also approved the bank's vision, mission, values and ethical guidelines. The Chief Executive Officer (CEO) is responsible for overall risk management, for ensuring that the risk management systems are implemented and for seeing that the bank's risk exposure is monitored and reported. The CEO is also responsible for the delegation of authority. The Chief Financial Officer (CFO) reports directly to the CEO. The CFO is responsible for the development of the risk management framework. In addition the CFO is responsible for the development and monitoring of the bank s risk management systems in cooperation with the Risk Manager function, according to the general framework for risk management. The Risk Manager function is provided by the parent company Gjensidige Forsikring ASA with the reporting line to the CEO. Risk Manager is responsible for the independent review of the bank's overall risk exposure and development through periodic reports to the Board. The Risk Manager also ensures that the requirements from Gjensidige Forsikring ASA are taken into account in the bank's risk management framework. The Compliance Officer is responsible for ensuring that the bank complies with the existing legislation and regulations and is provided by the bank's parent company Gjensidige Forsikring ASA. The Internal Audit is an independent assurance and advisory function within risk management and internal control. The internal audit function is performed by the Corporate Audit Department of Gjensidige. The internal audit function reports to the Board. Risk identification Risk is identified as part of the strategy and budget process. The risks are identified and analysed with respect to possible adverse events that can occur, the consequences of the events and measures to reduce the probability of adverse events occurring. Credit risk, concentration risk, market risk, operational risk, liquidity and business risks shall be measured in terms of the need for capital. These measurements will be based on generally accepted and adequate methods. CEO CFO Compliance HR Risk Mgmt Sales Marketing & CRM Product Credit Risk Technology Operations & Customer Service Treasury Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 7
Risk analysis and stress tests The risk analysis will form the basis for how the bank understands and manages risks. All major risk categories will be assigned a risk profile as part of the bank s Internal Capital Adequacy Assessment Process (ICAAP). Stress test is an important tool for analysing the impact of negative events on bank s financial performance, balance sheet and capital adequacy. Both the single factor stress tests and scenario analyses are used in order to expose the bank for a series of negative macroeconomic events during a five year period. Risk strategies Risk Strategies are the Board's instrument to determine the risk profile (ICAAP) and its return targets. Risk strategies shall ensure that the bank manages risks in line with approved risk profile. Risk strategies are based on the bank s strategic target and are revised at least annually. The CEO is responsible for proposing risk strategies to the Board. The bank sets risk strategies through high-level strategy, credit strategy and financial and liquidity strategy. The Board defines the bank's risk profile by establishing risk-based frameworks and targets for the individual areas. Risk management and internal control Sound risk management is an important instrument to achieve the bank's goals and and the purpose of risk management in the bank is to be an integrated part of its planning, strategy and decision-making processes. The bank shall have a capital management process that ensures: An effective capital acquisition and optimal capital usage in relation to the bank's strategic target and business strategies. A satisfactory capital adequacy based on chosen risk profile. Bank s ability to maintain the desired ratings. Utilizing growth opportunities in the bank's target market Reporting, monitoring and surveillance All managers and employees are responsible for the ongoing management of risk in their own areas. They shall report on risk and internal controls to their immediate manager at least once a year. The Risk Manager performs independent assessment of the overall risk exposure and trends through periodic reports to the Board. Contingency plans Contingency plans have been prepared addressing the bank's capital and liquidity situation under crises. Compliance There are established processes that ensure compliance with current laws and regulations, industry standards and internal guidelines. 5.2 Process for assessing risk exposure and capital (ICAAP) The following methods are used for calculating economic capital: Risk Type Credit risk Operational risk Market risk Liquidity risk Business and strategic risk Credit risk is measured using the standard method while operational risk is measured using the basic method. Market, liquidity and concentration risks are measured and summarised in a total risk model. A separate model has been developed for the calculation of business and strategic risk. In addition, stress tests are used as part of the basis for assessment of the bank's total risk. Capital requirement in subsidiaries Gjensidige Bank ASA and Gjensidige Bank Boligkreditt are the operative units of Gjensidige Bank Holding Group. At the end of 2014 Gjensidige Bank Group core Tier 1 capital was NOK 1,995.2 million and the core Tier 1 capital ratio 13.9 per cent. Primary capital was NOK 2,245.2 million that resulted in the capital adequacy ratio of 15.7 per cent. Gjensidige Bank ASA has issued subordinated loan of NOK 250 million in 2014 that is accounted as additional capital. The Group capital need is evaluated on a consolidated basis. Process and involvement Choice of method Standard method Basic method Total risk model, VaR Total risk model, VaR Business risk model, VaR The ICAAP process is integrated into the bank's strategy process and rolling five year business plan. Surveys and risk analyses are completed in terms of economic conditions and developments in key economic indicators, the competitive situation, the market, products and organisation. Surveys are also sent out in order to measure both customer and employee satisfaction. Measurements and stress tests of the bank's risk profile are conducted to create a starting point for assessing the bank's total risk exposure and the individual risks. The measurements are made on the basis of expected economic trends and using recession scenarios based on a time horizon of five years. These measurements form the basis for determining the bank's risk acceptance level and risk limits. Minimum capital adequacy requirements and the capital plan are determined by the bank's overall strategy, credit strategy, financial and liquidity strategy that must be approved by the Board. The bank's ICAAP document is based on the bank's strategy process and is reviewed by the bank's Board as part of this process. ICAAP is updated with the risk measurements that will capture changes that have occurred since the strategy and budget were approved by the Board. During final consideration by the Board, internal audit's assessment of ICAAP is also submitted. Capital adequacy is calculated quarterly and reported to the Board and Financial Supervisory Authority. Bank ICAAP document covers Gjensidige Bank Group which consists of Gjensidige Bank ASA and Gjensidige Bank Boligkreditt AS. 8 Gjensidige Forsikring Bank Holding hittil AS i and år og Gjensidige fjerde kvartal Bank 2012 Holding Group Pillar 3 2014
Quality assurance The corporate audit department reviews the ICAAP document and the internal audit report is presented to the Board. Involvement in management and control The risk measurements and stress tests that are carried out are included in the risk identification and risk analyses connected to the strategy process. 5.2.1 Capital Pillar II NOK million 31.12.2014 Credit risk 1,038 Operarational risk 88 CVA-risk 21 Min. capital requirement (Pillar I) 1,147 Market risk 23 Liquidity risk 38 Business risk 142 Capital requirement (Pillar II) 1,350 Primary capital 2,245 Margin Pillar II 895 Tier 1 capital 1,995 Core Tier 1 capital 1,995 As of 31. December 2014 the capital need under Pillar II accounted for NOK 1,350 million. Given the primary capital of NOK 2,245 million, the bank operated with the margin above the capital need of NOK 895 million. 6. Credit risk 6.1 Management and control of credit risk Definition Credit risk refers to the risk the bank faces related to a borrower s failure to repay a loan or credit or to meet their contractual obligation to the bank. The bank is also exposed to credit risk in connection with the placement of liquidity reserves. The bank's credit risk originates from loans and credits to consumers in Norway. Management and control of credit risk The Board sets the overall framework for the bank's appetite for credit risk through the bank's Credit Policy and Strategy. The bank's Credit Policy and Strategy is approved by the Board and provides general guidelines and limits to ensure that Gjensidige Bank's portfolios have an acceptable risk profile and provide long term profitability after losses. The bank uses application score models based on internal and external data of a customer in order to decide on the customer s application for a loan. In addition the bank uses behavior score models which predict the probability of default based primarily on the customer's credit behavior with the bank for decisions related to top-ups, collections, group provisioning and other portfolio management decisions. the best (lowest) risk to the highest (worst) risk segments based on their probability of default. These risk categorizations are done mainly to assist in various credit decisions. These are then further grouped into three main risk classes: Low risk, Medium risk and High risk which is used for the bank's monthly portfolio monitoring, reporting and follow-up of the customer base. The key parameters for monitoring credit risk in the portfolios are reported on a regular basis. Trends and performance versus specified benchmarks for credit risk are regularly reported to the Board. The credit manual contains detailed rules governing all aspects of the bank's policies for granting of a lending product. The credit manuals are prepared by the Credit Risk department, within the overall guidelines approved by the Board through the bank's Credit Policy and Strategy document. The CEO has been granted credit authority from the Board and may delegate his authority to others as appropriate. The CEO has delegated the responsibility for the daily credit risk management through credit authority to the Credit Risk Director. Furthermore, the Credit Risk Director has delegated the credit risk authority for the bank's business areas and credit portfolios to Credit Managers in each business area. The Credit Managers, reporting to Credit Risk Director, are responsible for the preparation of the bank's credit manuals, and to ensure compliance with those within respective business areas. With the help of these score models the lending portfolios in the bank are grouped into several risk categories starting from Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 9
6.2 Portfolio overview 6.2.1 Total commitment amount by type of commitment NOK million Loans and credit drawns Unused credit lines Gurantees Individual provisions Total As of 31.12.2014 27,547 5,273 5 3 32,828 6.2.2 Loans divided by geographic area NOK thousand 31.12.2014 31.12.2013 Loans by region Loans Per cent Loans Per cent Oslo 5,404,871 19.6 % 4,704,064 19.4 % Akershus 5,123,136 18.6 % 4,544,631 18.8 % Eastern Norway 5,954,032 21.6 % 5,343,785 22.1 % Southern Norway 736,119 2.7 % 657,443 2.7 % Western Norway 6,139,393 22.3 % 5,339,748 22.1 % Central Norway 2,717,611 9.9 % 2,335,088 9.7 % Northern Norway, Svalbard 1,467,109 5.3 % 1,251,764 5.2 % Abroad 4,242 0.0 % 17,405 0.1 % Total gross loans by geographic area 27,546,513 100.0 % 24,193,929 100.0 % 6.3 Defaults and write-downs of loans The bank s accounts are prepared in accordance with IFRS regulations and the accounting regulations (Utlånsforskriften) issued by the Ministry of Finance (Finansdepartementet). This means that all items in the profit and loss statement and balance sheet, including recognition of receivables and provisioning and losses on loans and credits, follow these principals. If there is objective evidence of an impairment (indication of a fall in value) for an individual loan or group of loans, a provision (write-down) will be calculated for the fall in value that is equal to the difference between capitalized value and the net present value of estimated future cash flows, discounted by the financial asset s original effective interest (i.e. the effective interest calculated at initial effective rates adjusted for subsequent changes). Objective evidence that a loan has been impaired (fallen in value) includes significant problems for the debtor, non-payment or other significant breach of contract, and if it is considered likely that a debtor will enter debt negotiations or if other concrete events indicating possible impairment have occurred. If a borrower does not meet the contractual obligation of payment of installment or overdraws a credit beyond the limits granted then the loan will be considered to be in a state of default. For secured loans, significant exposures are reviewed individually for objective evidence of impairment (fall in value) on a quarterly basis and where required an individual provision (write-down) is taken. In addition, for secured loans an individual review and write-down where required is also done on a monthly basis for all delinquent loans over 30 days and over a certain specified amount. For consumer finance loan 120 days delinquency is taken as an objective evidence of impairment (fall in value) and for loans meeting these criteria, the bank calculates a provision (write-down). The bank also has models for calculating write-downs on groups of loans that are not impaired. Using scores, the group writedown models estimate the likelihood of loss in these groups of loans, and compute the corresponding provisioning requirement to cover for such losses. A final write-off is recognized when it is evident that the loan will not be repaid and in such instances any corresponding provision (write-down) taken will be reversed. In the event of a payment on previously written-off loan, these are recognized as a recovery on a previously written-off loan. 6.3.1 Loans past due NOK million 31.12.2014 31.12.2013 10-30 days 383.0 419.9 30-90 days 95.0 95.0 Over 90 days 300.9 279.3 Total 778.9 794.2 10 Gjensidige Forsikring Bank Holding hittil AS i and år og Gjensidige fjerde kvartal Bank 2012 Holding Group Pillar 3 2014
6.3.2 Group write-downs on the balance sheet NOK million 31.12.2014 31.12.2013 Gross loans 27,546.5 24,194.0 Individual write-downs (3.3) (3.0) Group write-downs (351.8) (321.4) Net loans 27,191.4 23,869.6 6.3.3 Change in individual write-downs in the period NOK million 3.0 Reversal of impairment as a result of write offs for the period (0.2) New write-downs in the period 2.4 Reversal of previous write-downs (1.9) Write-downs of individual loans 31.12.14 3.3 6.3.4 Change in group write-downs in the period NOK million Group write-downs 1.1.14 321.4 Change in group write-downs in the period 30.4 Group write-downs 31.12.14 351.8 6.3.5 Gross loans and write-downs by risk groups The table below shows the portfolio and provisions as of 31. December 2014 segmented by the risk classes: Consolidated NOK million Gross lending Guarantees Total off balance commitments to customers: Individual provisions Other non-customer Maximum credit exposure exposure Low 22,103 4,244 26,347 Medium 3,796 945 4,741 High 1,095 72 1.167 Not classified 1 5 11 17 Past due and impaired 551 3 554 Total 31.12.14 27,547 5 5,273 3 32,828 Group provisions 352 352 Total net 31.12.14 27,195 5 5,273 3 32,476 6.4 Counterparty risk Definition The bank s main exposure to the credit risk arises from loans and credits to retail clients in the Norwegian market. The bank is also exposed to the credit risk through its placements of the liquidity reserve and exposure to the derivative instruments. The bank's counterparty risk, in connection with the placements of the liquidity portfolio, is managed through limits per counterparty. As of 31. December 2014 the main counterparties were Norwegian banks, mortgage credit institutions and Norwegian state. Measurement and reporting is performed monthly by the bank's treasury department. The bank uses interest rate swaps to manage the interest risk. As of 31. December 2014 the bank had interest rate hedge agreements for NOK 2,345 million in total. Measurement of risk The bank uses standard method for calculating capital requirement for credit and counterparty risk. Capital requirements for lending secured with mortgage on residential property and on cars are calculated differently from the capital requirements for unsecured lending. Market values of securities are basis for the calculation. The bank also defines capital need for unused credit lines in the calculation. Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 11
7. Market risk Definition Market risk is the risk of losses associated with unfavorable movements in market prices, which in this context relates to positions and activities in the interest rate, currency and stock markets. Management and control of market risk The bank s finance strategy set by the Board provides guidelines and limits on managing the banks market risk. The bank s market risk is substantially related to interest rate risk and spread risk (credit risk). Gjensidige Bank ASA does not have currency or shares related risk. Interest rate risk arises when the bank s assets and liabilities have different remaining fixed-rate period. The interest rate risk is managed by adopting fixed interest rate periods on assets and liabilities. In addition derivatives are used for hedging. Fixed interest assets and liabilities in million multiplied by the remaining interest rate period are used to measure interest rate risk exposure. This is known as milli years (MY). The limit for the interest rate risk under one year is a negative exposure of up to 500 milli years (MY). A limit is also provided for interest rate risks for all time periods plus/ minus 300 MY. The bank s limit for cumulative exposure to interest rate risk is 500 MY. Interest rate risk under three months is measured and reported but the exposure is not included in the interest risk limits. When the limit is fully utilised, the loss for the bank at one percentage point change in the yield curve will be NOK 5 million. Utilisation of this limit is reported monthly to the Board. By investing in solid securities with short-term maturity with expectations that the value is less exposed to changes in credit spread, the bank limits its spread risk on its assets. The market value on the bank s bond issues varies with changes in the credit spreads. As a result of the development in the market and upgrade of the bank s rating the credit spread for funding in 2014 has decreased. Gjensidige Bank ASA is not exposed to market risk under Pillar 1, because the bank does not have a trading portfolio. Measurement of risk Bank uses internal model for the calculation of capital need for market risk. Based on a CIR (Cox-Ingersoll-Ross) interest rate model the bank generates for each of the interest rates a probability for the distribution of annual changes in interest rates. These probability distributions are multiplied by the total interest rate exposure for the corresponding category. This gives the probability of interest rate related loss within each category. These distributions are again summed up to give the total interest rate risk related loss. 7.1. Equity positions outside the trading portfolio The bank has no investments in equity instruments. 8. Operational risk Definition Operational risk is risk of loss resulting from inadequate or inefficient internal processes or systems, human errors or external events. Management and control of operational risk The following are key elements in the management of operational risk: Annual risk assessment of business areas and administrative functions with respect to the targets and strategies for the plan period. The CEO, in consultation with the bank's management team, assesses the strategic / business risks together with operational risks. This assessment forms the basis for establishing measures to manage the most significant risks. In addition, separate risk assessments are carried out when implementing new products and systems. Quarterly internal control testing of the most critical processes in various operational units with results reported to the bank's management team. Annual verification on risk management and internal control during which status is reported upward in the organisation. This verification provides basis for suggestions for improvements in a variety of areas and is also important input for the CEO's risk assessment in his report to the CEO of the parent company Gjensidige Forsikring ASA. Recommendations from internal audit on the audited areas. Annual assessment of compliance risks. Ethical rules that all employees are familiar with. The bank has operational incident database for the assessment, follow up and registration of unwanted incidents. The heads of operative units are responsible for identification, management and control of the operational risk within their areas. Measurement of risk This is based on the capital needs identified under Pillar 1 calculations using basic method. There is no additional capital calculated for operational risk under Pillar 2. 9. Other risks 9.1 Liquidity risk Definition Liquidity risk is the risk of the bank not being able to meet its debt obligations when due and/or not being able to finance its assets growth without incurring a substantial increase in costs. Management and control The bank s finance strategy set by the Board provides guidelines and limits on managing the banks liquidity risk. The bank has established guidelines and limits on liquidity risk and risk tolerance, guidelines for liquid assets, guidelines for stable long-term funding and contingency plans. The bank shall have its liquidity reserve (buffer) placed in short-term deposits, liquid securities and/or committed credit facilities which would allow appropriate time to implement the necessary measures in a situation of acute liquidity freeze in the market. 12 Gjensidige Forsikring Bank Holding hittil AS i and år og Gjensidige fjerde kvartal Bank 2012 Holding Group Pillar 3 2014
Measurement of risk Bank uses an internal model to calculate capital need for the liquidity risk. Two sources of liquidity risk are assessed: Risk arising from the downgrade of Bank rating when Bank still has access to funding in the financial market. Bank has no access to funding in the financial market due to general liquidity freeze or due to losing its reputation Liquidity risk arising from losses that result in a downgrading of credit rating category is defined as the charge against equity due to increased financing costs. This is a secondary risk in the sense that it arises from large losses in other areas which in turn create a problem for the bank in financing itself through borrowing. The new rating is derived on the basis of the total of loss. Then the change in the risk premium is derived from the new rating. A change in the risk premium is simulated by beginning with a normal distribution with specific expectations and a specific standard deviation. The liquidity need is entered into the program and multiplied by the change in the risk premium. Liquidity risk as a result of the reduced access to the liquidity is about having sufficient liquid assets to meet liabilities when they are due. Stress tests are used to test robustness of banks liquidity situation. 9.2 Business risk Definition The risks related to unexpected fluctuations in revenues or expenses due to economic changes or changes in customer behaviour, changes in the market and competitive situation or government regulations. Management and control This risk includes the danger of declining revenues as a result of changed customer behaviour due to the competitive environment, trends or a weakened reputation, or that bank s income declines as a result of failed strategic initiatives in new markets or with new products. The inability to address changes in customer behaviour by adapting the bank's products is also a business risk. This risk is managed using bank's overall strategy in which surveys of customer behaviour and analyses of the competitive situation and the market are taken into account when developing the business. The budget and scorecards for monitoring are established, reported and followed up monthly. Measurement of risk The bank measures capital need using a model that is based on the methodology referred to as "earnings volatility modelling". This is a simulation based method that calculates the need of capital for the business risk based on the variations in expected income. Gjensidige Bank Holding Gjensidige AS and Gjensidige Forsikring Bank hittil Holding i år og Group fjerde kvartal Pillar 3 2014 2012 13
Gjensidige Bank Holding AS Schweigaards gate 14 NO-0185 OSLO, Norway Gjensidige is a leading Nordic insurance group built by customers, for customers. The Group has been listed on the Oslo Stock Exchange since 2010. For nearly 200 years, we have worked passionately to secure the lives, health and assets of our customers. We have about 3,500 employees and offer insurance products in Norway, Denmark, Sweden and the Baltic states. In Norway, we also offer retail bank, pension and savings. Operating income was NOK 23.1 billion in 2014, while total assets was NOK 114.0 billion.