Million euros. Data at 31 December 2014
Funds 2013 Specific gross provision and writedowns Collective
provison Exchange rate and
other
Write offs Funds
2014 Individually determined 21.,934 Individually determined 21,784 Collectively determined 3,747 Collectively determined 6,262 2,271 974 10,948 (11,827) 25,681 28,046
Performance 2012-2014
2012 2013 2014Funds (start of period) 19,531 26,111 25,681
Collectively determined 4,058 4,319 3,747 Individually determined 15,474 21,793 21,934 Gross allocation determined individually and writedowns 19,508 12,335 10,948 Allocation 13,869 12,140 10,948 Writedowns 5,639 195 — Capital gains 358 (212) 974
Exchange rate and other (1,939) (1,928) 2,271
Write-offs (11,347) (10,626) (11,827)
Funds (end of period) 26,111 25,681 28,046
Forbearance portfolio
The term forbearance portfolio refers for the purposes of the Group’s risk management to operations which the client has presented, or financial difficulties are envisaged for meeting payment obligations in the prevailing contractual terms and, for this reason, steps were taken to modify, cancel or even formalise a new transaction.
Grupo Santander has a detailed corporate policy for forbearance which acts as a reference in the various local transpositions of all the financial institutions that form part of the Group, and share the general principles established in Bank of Spain circular 6/2012 and the technical criteria published in 2014 by the European Banking Authority, developing them in a more granular way on the basis of the level of deterioration of clients.
This corporate policy sets rigorous criteria of prudence for assessing these risks:
• There must be restrictive use of restructurings, avoiding actions that delay recognising deterioration.
• The main aim must be to recover all the amounts owed, which entails recognising as soon as possible the amounts that it is estimated cannot be recovered.
• The restructuring must always envisage maintaining the existing guarantees and, if possible, improving them. Effective guarantees not only serve to mitigate the severity, but also can reduce the probability of default.
• This practice must not involve granting additional financing to the client, serve to refinance the debt of other banks, or be used as an instrument of cross-selling.
• It is necessary to assess all the forbearance alternatives and their effects, ensuring that the results would be better than those likely to be achieved in the event of not doing it.
• Severer criteria are applied for the classification of forbearance operations which prudently ensure the re-establishment of the client’s payment capacity, from the moment of forbearance and for an adequate period of time.
• In addition, in the case of clients assigned a risk analyst, individualised analysis of each case is particularly important, both for their correct identification as well as subsequent classification, monitoring and adequate provisions.
The policy also establishes various criteria related to determining the perimeter of operations considered as forbearance, through defining a detailed series of objective indicators that enable situations of financial difficulty to be identified.
In this way, operations not classified as doubtful at the date of forbearance are generally considered as being in financial difficulties if at this date non-payment exceeds a month. If there is no non-payment or if this does not exceed the month of maturity, other indicators are taken into account including:
• Operations of clients who already have problems with other transactions.
• When the modification is made necessary prematurely, without there yet existing a previous and satisfactory experience with the client.
• In the event that the necessary modifications involve granting special conditions such as the need to have to establish a temporary grace period in the payment or, when these new conditions are regarded as more favourable for the client than those granted in an ordinary admission.
• Request for successive modifications over an unreasonable period of time.
• In any case, once the modification is made, if any irregularity arises in the payment during an established period of
observation, even if there are no other symptoms, the operation will be considered within the perimeter of forbearance
(backtesting).
As soon as it is determined that the reasons giving rise to the modification are due to financial difficulties, two types of forbearance are distinguished for management purposes on the basis of the management situation of these operations in origin: ex ante forbearance when the original operation is considered a doubtful risk and ex post forbearance when arising from a doubtful situation.
In addition, within ex post forbearance treatments applicable for cases of advanced deterioration are distinguished, whose requirements and classification criteria are even more severe than for the rest of forbearance.
Once the forbearance is done, those operations that remain classified as doubtful risk for not meeting at the time of
forbearance the requirements for their reclassification to another category, must fulfil a schedule of prudent payments in order to ensure with reasonable certainty that the client has recovered his payment capacity.
If there is any irregularity (non-technical) in payments during this period, the observation period is begun again.
Once this period is over, conditioned by the customer’s situation and by the operation’s features (maturity and guarantees granted), the operation is no longer considered doubtful, although it remains subject to a test period with special monitoring. This tracking is maintained as long as a series of requirements are not met, including: a minimum period of observation, amortisation of a substantial percentage of the amounts pending and having met the unpaid amounts at the time of forbearance. The forbearance of a doubtful operation, regardless of whether, as a result of it, the transaction remains current in payment, does not modify the date of non-payment considered for determining the provisions. At the same time, the forbearance of a doubtful operation does not give rise to any release of the corresponding provisions.
The total volume of forbearance stood at EUR 56,703 million at the end of 2014 (7% of the Group’s total customer loans), with the following structure 6:
Million euros
Risk Non-doubtful Doubtful Total
Amount Amount Amount % spec. cov.
Total 33,135 23,568 56,703 21%
On a like-for-like basis with 2013, the Group’s level of forbearance declined 6% (-EUR 3,229 million), continuing the reduction of the previous year.
As regards loan classification, 58% is non-doubtful. Of note is the high level of guarantees (75% with real guarantees) and adequate coverage through specific provisions (21% of the total forbearance portfolio and 45% of the doubtful portfolio).
Management metrics7
Credit risk management uses other metrics to those already commented on, particularly management of non-performing loans variation plus net write-offs (known in Spanish as VMG) and expected loss. Both enable risk managers to form a complete idea of the portfolio’s evolution and future prospects.
Unlike non-performing loans, the VMG refers to the total portfolio deteriorated over a period of time, regardless of the situation in which it finds itself (doubtful loans and write-offs). This makes the metric a main driver when it comes to establishing measures to manage the portfolio.
6. The figures of the non-doubtful portfolio include the portfolio in normal and substandard classification of Bank of Spain circular 4/04. For more detail, see note 54 of the auditor’s report and annual financial statements.
The VMG is frequently considered in relation to the average loan that generated them, giving rise to what is known as the risk premium, whose evolution can be seen below.