Integrated Report
Governance Report
Financial Statements
Special 50th anniversary
annual report 2015
06. Risks

Prudent risk appetite framework

Bankinter has a risk management model of proven effectiveness, aligned with regulatory standards and international best practices, and proportional to the scale and complexity of its activities.

The final responsibility for risk management is with the Board of Directors, which approves the risk strategy on an annual basis and, especially, defines the Appetite for Risk framework, which establishes:

  • The type and levels of different risks that the Group considers reasonable to take on in developing its business strategy.
  • A set of metrics and key indicators to monitor and manage risks. They cover variables including risk levels and cost, profit, liquidity and capital. For every metric, a tolerance and limit are established that, if reached, activate the adoption of corrective actions.

The risk strategy is divided into two planes: the risk appetite statement and its management principles:

Risk appetite statement. Bankinter carries out business with a prudent risk profile, pursuing a balanced balance sheet and a recurring and healthy income statement, to maximise the institution's long term value.

Risk management principles. Bankinter carries out business with a prudent risk profile, pursuing a balanced balance sheet and a recurring and healthy income statement, to maximise the institution's long term value.

  • Management strategies, policies, organisation and systems that are prudent and suitable to the size, scope and complexity of the company's lines of business, based on quality banking practices.
  • Low or moderate exposure to credit risk, with a non-performing loans index in the lowest range of the Spanish financial system.
  • Suitable coverage of problematic assets.
  • Appropriate remuneration of invested capital to ensure minimum returns on the risk-free rate throughout the cycle.
  • Low market risk level to limit losses under stress scenarios.
  • Intense growth in strategic priority sectors of large and medium-sized enterprises.
  • Balance of credit investment portfolio of individuals and businesses.
  • Balanced growth of retail financing resources and their cost optimisation.
  • Diversification of wholesale financing sources, both from the point of view of instruments and markets and maintenance of a balanced maturities profile.
  • Risk diversification to avoid excessive concentration levels.
  • Limitation of business in potentially risky sectors, like those related to realestate development and construction, or with a negative impact on the bank's reputation.
  • Moderate interest rate risk appetite.
  • Structural position very small for foreign currency.
  • Optimisation of efficiency ratio.
  • Maximisation of shareholders' value generation throughout cycles via dividends and stock revaluation, over a strong capital and liquidity base.
  • Capital level Common Equity Tier 1 (CET1) within the fluctuation band the company established, higher in all cases than the regulatory minimum.

Bankinter also has a corporate governance model that is aligned with the most demanding supervisory standards. To stimulate and reassert its solid risk culture, it has a highly qualified team supported by advanced information systems, which are core areas of the bank's management. These items are described in greater detail in the Prudential Relevance Report and in the annual Corporate Governance Report. Complementary financial data are in the Group's Legal Report. The location and main sections of these documents are detailed at the end of this section with regard to risk management.

Credit risk

Credit risk is the possibility of suffering losses stemming from non-compliance with debtors' contractual obligations. Its evolution is conditioned by the economic and financial environment. For Spain, in 2015 the economy consolidated its recovery and the GDP grew above 3%. In 2016 the maintenance of favourable conditions is expected and that basic imbalances continue to be reduced (unemployment and public and private debt), although political instability is a factor of uncertainty.

In this context, the volume of new system credit transactions increased in 2015, although total credit continues to drop, due to the higher volume of repayments. According to Bank of Spain data, in November 2015 home and non-financial business loans were 2.2% and 1.4% lower, respectively, than in the same month of the previous year.

In contrast, the quality of Bankinter's  assets led to it having behaviour above the sector average, with growth of 4.4% in computable credit risk (including investment and off-balance sheet exposure). The distribution of its credit portfolio between individuals and companies moved towards balance, as can be seen in the attached chart. In 2015 the risk with individuals grew 2.3% (until representing 51.4% of the total) and with companies, 6.8% (48.6%).

Non-performing loans

In terms of non-performing loans, the fiscal year closed up with an index of 4.13% (or 59 basis points less than the previous year), compared to 10.35% for the sector as a whole, according to Bank of Spain data from November 2015. The volume of problematic and foreclosed assets were also much lower than for the Group's main competitors. At the close of December 2015 the foreclosed assets portfolio was 531 million euros, 1.1% of total credit risk, with a 9.3% reduction during the year. At-risk exposure dropped to 2039 million, an 8.7% decrease.

Distribution of credit risk

The company regularly monitors risk diversification by sectors, geographic location, products, guarantees, customers and offsets, and it has established policies on the maximum permitted risk concentration. The geographic distribution of credit by regional offices is depicted in the graph below.

By customer sectors, the credit portfolio distribution was:

Individuals. In 2015 a slight reactivation of credit demands from individuals was registered, supported by the improvement of the economic situation. This fact, accompanied by the stabilisation of the real estate market in the regions in which Bankinter has the strongest presence, made it possible to increase financing to individuals. The total portfolio (24,849 million euros at year end) maintained its high credit quality, with a non-performing loans of 2.97%.

Corporate banking. Bankinter has extensive experience in this sector, and its business is more internationalised and therefore less exposed to Spain's economic cycle, which is why it's non-performing loan rate is lower. Investment in 2015 dropped slightly (13,353 million euros, 3.9% year-onyear decrease) with a non-performing loans ratio of 1.97%.

Small and medium-sized enterprises. The largest growth in risk in the fiscal year was recorded in the small and medium-sized enterprises segment, located at 10,243 million euros when the year closed, with a positive yearon- year variation of 26.4% and nonperforming loan rate of 8.15%. The company applies automated decisiontaking models for managing this segment, along with a team of analysts with extensive experience.

Developers. Bankinter establishes criteria that are highly prudent for accepting real-estate development operations, selecting exclusively viable projects by solid development companies with accredited experience. The balance in developer credit when the year closed was 971 million euros, representing 2.0% of credit risk, much lower than the average exposure of the Spanish banking system.

Internal rating models

Bankinter has used internal rating models as a support tool for taking decisions on credit risk since the nineties. These models let the credit quality and solvency of transactions and customers be assessed, and provide quantitative measurements of credit risk. Their main uses are the support for approvals, price setting, monitoring of portfolios and support for recovery, facilitating active management of the risk profile.

Internal rating models also facilitate the homogeneous grouping of customers and transactions with comparable credit levels. The models are also calibrated to assess expected and unexpected losses of foreseeable capital. These metrics are fundamental for managing and monitoring credit risk.

Bankinter has rating models both for retail sectors (mortgages, consumer spending, SMEs…) as well as for the wholesale sectors of Corporate Banking. These statistical models are developed with information at the level of customers, transactions and macroeconomics, combined for wholesale part with skilled analysis. The models are updated and monitored periodically to ensure their power of discrimination, stability and accuracy under a strict governance schema. The Model Committee and the Executive Risk Committee are responsible for approving Bankinter models. The Risk Commission also receives regular information on the status and monitoring of the models.

The distribution of exposure at default (EAD) by internal sectors or categories is shown below.

Structural and market risks

From the viewpoint of structural and market risks, 2015 was marked by depression of inflation in the main economies, which favoured considerable activity by central banks to provide liquidity to financial agents and to intervene in public debt financial markets. In some markets, the systematic purchases of public debt by the central banks decreased its depth.

The year on markets was characterised by the appreciation of the dollar, continued drops in raw material prices and equity volatility.

Structural interest rate risk

Structural interest risk is defined as an institution's exposure to potential losses due to variations in market interest rates, as a result of different temporary maturity structures and adjusted values in the overall balance sheet.

Bankinter actively manages this risk with the aim of protecting its financial margin and preserving its financial value when faced with interest rate variations.

The situation in the interest risk arena (gap) of the Bankinter Group at the close of 2015 was:

On the other hand, dynamic simulation analyses are carried out that allow the sensitivity of the financial margin to be estimated under different scenarios of interest rate movements. Similarly, and with a longer-term view, the sensitivity impact that interest rate movements would have on the company's economic value is analysed.

The exposure to interest rate risk of the net interest income in the face of variations of +/- 100 parallel basis points in the market interest rates is +/- 3.6% for a 12-month horizon. Given the current level of rates and taking into account that a floor is applied at 0%, as recommended by the supervisory authorities, the sensitivity in the face of the rise and reduction of rates is significantly different. The sensitivity of the economic value under parallel movements of 200 basis points at the close of 2015 was placed at +6.8% of its internal capital.

Liquidity risk

Structural liquidity risk is associated with the company's capacity to handle the payment obligations it takes on and to finance its investment business. The bank actively manages its liquidity situation and its impact, as well as the actions to execute both in normal situations and in exceptional circumstances due to internal causes or market behaviours.

Measures used to control liquidity risk include monitoring the evolution of gap and liquidity, as well as obtaining information on and analysing the specific situation of balances resulting from sales transactions, wholesale maturities, interbank assets and liabilities and other financing sources. These analyses are performed both under normal market conditions and simulating different scenarios of liquidity needs that could stem from different business conditions or market variations.

During 2015 the commercial gap (difference between investment and customers' resources) was reduced by 2,430 million. As a result, the percentage of credit investment that is financed by customer resources rose from 78.3% to 83.5%. On international markets, 2750 million euros were placed in mortgage bonds at 5, 7 and 10 year terms under the fixed income programme registered with the CNMV, which also diversifies the Bankinter debt maturities and gives it a solid liquidity position.

To respond to the demand for short term titles, the bank used programmes of short term securities, primarily on the domestic market, with its promissory note programme. The balance of promissory notes placed on the wholesale market was 547 million on 31 December.

Market risk

Market risk is the possibility of suffering losses stemming from adverse movements in the market prices of negotiable financial instruments with which the bank trades, as a result of variations in factors such as interest rates, exchange rates, credit spreads and other financial variables.

Bankinter measures the value at risk with the historic VaR methodology with data for one year and a confidence interval of 95%.

An asset portfolio's value at risk (VaR) is the maximum potential loss that could occur to it on a specific timeline, with a statistical confidence level. Given the instability of recent years, Bankinter maintained the limits from the previous year in VaR terms.

The chart below depicts VaR values at the close of 2015 for trading positions:

Moreover, there is monthly monitoring of the VaR for the portfolio positions of the subsidiary Línea Directa Aseguradora, using the historic simulation methodology. The VaR of the Línea Directa Aseguradora portfolio was, under the same hypotheses, 2.39 million euros at the close of December 2015. The same monitoring is performed of the possible risk that the subsidiary Bankinter Luxembourg could incur. With the same methodology, for 2015 its VaR was estimated at 0.10 million euros.

Stress testing, or analysis of adverse scenarios, is a complimentary test to the VaR. Stress test estimates quantify the potential loss that extreme movements in risk factors to which a portfolio is exposed could cause to the portfolio. Stress test scenarios are obtained by analysing the behaviour of these risk factors under historic conditions, simulating the impact that sharp changes in interest rates, stock exchanges, exchange rates, credit spreads and significant volatility changes could have on the portfolio.Moreover, the movements observed in relevant historic crises are also simulated.

The chart below details the estimated stress test data of the bank's trading positions at the close of 2015, using the most extreme scenario of movements of the different risk variables.

Applying the same scenarios to the positions of the Línea Directa Aseguradora portfolio at the close of 2015, stress totalled 33.48 million euros. For the Bankinter Luxembourg portfolio, stress represented 0.79 million euros.

Operational risk

Operational risk is defined as the possibility of suffering losses due to failures of processes, people or internal systems; or due to external events, such as legal incidents or natural disasters, excluding strategic and reputational risks.

The model to manage operational risk that Bankinter folows is known as the standard method according to solvency regulations in force. Moreover, Bankinter ensures access to best sector management practices by participating in the Spanish Operational Risk Consortium, a private forum of financial institutions to exchange experiences in this field.

These losses are concentrated mainly in the branch distribution network (with 83%), despite the larger volume of transactions done via remote channels. This makes the relevance of the human factor clear in unleashing operating errors, as well as highlighting the strength of automated features and contracting procedures employed on Bankinter's remote networks (internet, telephone and mobile banking).

With regard to loss events, Bankinter's operational risk profile is summarised in the charts below:

Reputation risk

Reputational is defined by the Bank of Spain as those stemming from the institution's actions that make negative publicity possible related to its business practices and relations, that can cause a loss of trust at the institution, and thus affect its solvency. It is also true that actions attributed to the company can also affect, not only solvency, but other aspects such as loss of customers, sanctions, difficulty in accessing financing... in short, the whole business.

There are currently no specific regulations to control and quantify this type of risk, but although there has been a recent trend among the main international regulators to delimit it with greater clarity.

Bankinter's reputational risk map is key for identifying risks and establishing levels to prioritise them. The main risks and possible improvements to the management system are integrated into the corporate risk map, designing action plans to reduce the probability of their occurrence and mitigate their possible impact.

One of the important factors to foresee reputational risks is understanding market and environmental trends, as well as knowing what is being said about the company in the media and on social networks. To this end, Bankinter has a measurement system that analyses all this information and considers its reputational impact.

The Bank also has a periodic diagnostic and measurement system to gauge the perception and expectations of the company's stakeholders. Based on RepTrak® methodology, this system lets the key reputation influences be identified, and have an active influence on the most worrisome ones.

The company's Products Committee identifies and evaluates possible reputational risks prior to launching a new product or service.

A series of internal and external indicators that impact the bank's reputational risk have also been defined, in accordance with the directives set by the European Banking Authority.

Lastly, it merits mention that the Bank's Corporate Reputation Department has developed a crisis management plan, with the aim of establishing the communication channels and action protocols for any emergency or crisis, in order to protect the institution's reputation and uphold business continuity.

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