Risk management
ADOPTION OF THE RECOMMENDATIONS OF THE FINANCIAL STABILITY FORUM AND OF THE COMMITTEE OF EUROPEAN BANKING SUPERVISORS RELATING TO THE TRANSPARENCY OF INFORMATION AND VALUATION OF
ASSETS
I. BUSINESS MODEL
1. Description of the business model
In the chapter of the Directors’ Report dealing with financial and business structure, a detailed description is presented of the Group’s financial structure and the main business areas.
The BPI Group’s activity is centred on the commercial banking business, predominantly focused on the attraction of Customer resources and on the granting of loans to individuals, companies and institutions in Portugal, through Banco BPI, and in Angola, through BFA. The Group also carries on investment banking activities – Equities, Corporate Finance and Private Banking –, asset management – unit trust fund management, pension funds and capitalisation insurance – and private equityG.
DR – Financial and business structure, page 11 to 13.
2. Description of strategies and objectives
Management’s strategic priorities and an evaluation of the Group’s performance and results in 2009 are presented in the
“Introduction to the Report” and in the chapters entitled
“Financial review” and “Risk management”.
Effective from the third quarter of 2007, BPI implemented a programme designed to respond to the immediate challenges posed by the international financial crisis: (i) defence and reinforcement of capital; (ii) ensuring comfortable liquidity levels, (iii) reducing and controlling risks; and (iv) strengthening the relationship with Customers, while sacrificing immediate returns.
At the beginning of 2009, BPI added improved profitability to the list of predefined priorities and, in August, with the progressive normalisation of the financial markets, reordered its priorities, placing the Customer 1st, profitability 2nd, followed then by risks, capital and liquidity.
DR – Presentation of the report, page. 6 to 9; Financial review, pages 65 to 67 and Risk management, page 112 to 114.
3. Description of the importance of the operations carried out and the respective contribution to business
In the chapters “Domestic commercial banking”,
“Bancassurance”, “Asset Management”, “Investment Banking”,
“Private Equity” and “International commercial banking”, the activity carried out in 2009 is described in detail for each business area. In the “Financial review” chapter, and in the notes to the financial statements, in note “3 – Segment Reporting”, an analysis is made of each business area’s contribution to the BPI Group’s net profit, the balance sheet and investments, as well as of the capital allocation to each one of these areas.
DR – Domestic commercial banking, page 38; Bancassurance, page 51; Asset Management, page 52; Investment banking, page 56; Private Equity, page 59; International commercial banking, page 60; Financial review, page 68;
NFS – 3. Segment reporting, page 146.
4. Description of the type of activities undertaken
5. Description of the objective and extent of the institution’s involvement relating to each activity undertaken.
In the chapter dealing with financial and business structure, a detailed description is presented of the Group’s financial structure and the main business areas. In the chapters
“Domestic commercial banking”, “Bancassurance”, “Asset Management”, “Investment Banking”, “Private Equity” and
“International commercial banking”, the activity carried out in 2009 is described for each business area.
The global financial crisis significantly affected the functioning of the capital market, in particular in the period September 2008 to March 2009, which was marked by a substantial decline in liquidity in fundraising operations on the primary market, a decrease in liquidity and an increase in bond spreadsGon the secondary market, coupled with a generalised retreat in stock prices on the equity market. The situation pervading the markets ended up having a contagion effect on the real economy on a global scale.
The importance to BPI of the capital markets stems primarily from the recourse to it for raising medium and long-term funding.
The BPI Group also resorts to the capital market for trading in interest-rate instruments and equities and, over the past few years, has maintained a portfolio of investments in bonds and participating interests as a form of diversifying the bank’s sources of income. The state of the capital market is also crucial for asset management and investment banking business.
The “Risk management” and “Financial review” chapters describe BPI’s activities in the interbank and medium and long-term capital markets in 2009, as well as the behaviour of the financial assets and investments portfolios.
DR – Domestic commercial banking, page 38; Bancassurance, page 51; Asset Management, page 52; Investment banking, page 56; Private Equity, page 59; International commercial banking, page 60; Financial review, pages 74 and 75; Risk management, page 112 to 114.
II. RISK AND RISK MANAGEMENT
6. Description of the nature and extent of the risks incurred in relation to the activities carried out and the instruments utilised
In the “Risk Management” chapter and in the notes to the financial statements, in note “4.48. Financial risks”, a description is given of the major risks attaching to the Group’s operations and the financial instruments used by it.
DR – Risk management, page 98 to 116;
NFS – 4.48. Financial risks, page 201 and following.
7. Description of major risk-management practices in operations
In the “Risk management” chapter and in the Corporate Governance Report, in chapter “5. Risk management”, a detailed description is given highlighting the major risks attaching to the Group’s operations, risk analysis and management and the division of the responsibilities amongst the various bodies.
The note to the financial statements, “4.48. Financial risks”, presents the fair value of the financial instruments and the valuation of the risk exposure resulting from financial instruments – credit risk, liquidity risk, market risk (interest-rate risk, equities risk and currency risk).
DR – Risk management, page 98 to 116;
NFS – 4.48. Financial risks, page 201 and following;
CGovR – 5. Risk management, page 298;
III. IMPACT OF THE PERIOD OF FINANCIAL TURBULENCE ON EARNINGS
8. Qualitative and quantitative description of earnings In the “Financial review” chapter, a qualitative and quantitative review is presented dealing with the Group’s operations and results and the impacts of the international financial crisis in 2009.
DR – Financial review, page 64 to 97.
9. Breakdown of the write-downs / losses by types of products and instruments affected by the period of turbulence The notes to the financial statements “4.5. Financial assets available for sale” and “4.7. Loans and advances to Customers”, present details of impairment and unrealised losses, security by security.
The notes to the financial statements “4.20. Provisions and impairment losses” and “4.40. Net income on financial operations”, present details of the losses recognised in consolidated net profit, resulting from the loans and securities portfolios held by the BPI Group.
NFS – 4.5. Financial assets available for sale, page 156; 4.7.
Loans and advances to Customers, page 164; 4.20. Provisions and impairment losses, page 182; 4.40. Net income on financial operations, page 195.
10. Description of the reasons and factors responsible for the impact suffered
In the “Financial review” chapter, a qualitative and quantitative review is presented showing the Group’s operational and financial performance and the impacts of the international financial crisis.
In the “Background to operations” chapter, a description is given of the economic environment behind the domestic and
Report | Annexes 119 international operations (Angola and Mozambique), the behaviour
of the financial markets and impacts of the international financial crisis on the economies and markets.
DR – Financial review, page 64 to 97; Background to operations, page 27 to 37.
11. Comparison of the i) impacts between (relevant) periods and ii) financial statements before and after the turbulent period
A description of the impacts of the international financial crisis and a comparative review of the 2009 financial statements relative to the previous year are presented in the “Financial review” chapter.
DR – Financial review, page 64 to 97.
12. Breakdown of the write-downs between realised and unrealised amounts
The impact on the Group’s results of the drop in the value of the equities and bond portfolios is described in the “Financial review” chapter (“Profits from financial operations” and
“Impairment losses for the year”).
In the “Financial review” chapter and in the notes to the financial statements “4.5. Financial assets available for sale” and “4.7.
Loans and advances to Customers”, details are presented of the impairment losses and unrealised losses, security by security, at 31 December 2009.
DR – Financial review, pages 85, 86, 89 and 90;
NFS – 4.5. Financial assets available for sale, page 156 and 4.7.
Loans and advances to Customers, page 164.
13. Description of the influence of the financial turbulence on the behaviour of Banco BPI shares
In the Group’s Corporate Governance Report, chapter “11. Banco BPI Shares”, a description is presented of the stock exchange behaviour of Banco BPI shares and of the influence that the adverse performance of the equity markets at global level had on the share’s behaviour.
CGovR – 11. Banco BPI shares, page 326.
14. Disclosure of the maximum loss risk
In the “Risk management” chapter and in the note to the financial statements “4.48. Financial risks”, information is presented regarding the maximum losses resulting from the unexpected changes in the price of instruments or operations and risk indicators based on VaR and stress testGmodels.
DR– Risk management, page 110 and 111;
NFS – 4.48. Financial risks, page 201 and following.
15. Disclosure of the impact that the evolution of the spreads associated with the institution’s own liabilities had on earnings An analysis is presented in the “Financial review” chapter of the trend in remunerated asset and liabilities spreads and their impact on the Group’s earnings.
The Bank did not revalue its liabilities.
DR – Financial review, page 82 to 84, 94 and 95.
IV. EXPOSURE TYPES AND LEVELS AFFECTED BY THE TURBULENT PERIOD
16. Nominal value (or amortised cost) and fair value of exposures
In the note to the financial statements “4.48. Financial risks”, the book value is compared with the estimated fair value for most of the BPI Group’s assets and liabilities at 31 December 2009.
The note to the financial statements “4.5. Financial assets available for sale”, presents details of the nominal value, book value and unrealised gains and losses recorded in the fair value reserve, security by security, at that date.
NFS – 4.48. Financial risks, page 201 and following; 4.5.
Financial assets available for sale, page 156.
17. Information about credit risk mitigation and respective effects on existing exposures
In the “Risk management” chapter, a description is made of the impact of credit risk mitigation in credit operations with Customers and in derivative operations.
DR – Risk management, page 99 to 109.
18. Detailed disclosure of exposures
In the Risk Management chapter and in the note to the financial statements – “4.48. Financial risks” – an analysis is presented of the quality of the loan and securities portfolios based on rating systems and internal scoringGand on the recourse to external ratings. The information is complemented by the analysis of the default levels, the existence of tangible guarantees and cover by impairment allowances.
The exposure to country riskGis described in a separate section of the “Risk management” chapter.
In the notes to the financial statements “4.5. Financial assets available for sale” and Note “4.7. Loans and advances to Customers”, details are presented of the exposures to available-for-sale securities and securitised loans, security by security (including structured products, namely SIV and ABS).
DR – Risk management, page 101 to 109;
NFS – 4.48. Financial risks, page 201 and following; 4.5.
Financial assets available for sale, page 156; and 4.7. Loans and advances to Customers, page 164.
19. Movements which occurred in the exposures between the relevant reporting periods and the underlying reasons for these variations (sales, write-downs, purchases, etc.)
In the “Financial review” chapter the principal changes occurring in the financial assets and investments portfolio are described.
DR – Financial review, pages 74 and 75.
20. Explanations about exposures which have not been consolidated (or which have been recognised during the crisis) and the associated reasons
The BPI Group consolidates all the exposures in which it has significant control or influence, as envisaged in IAS 27, 28 and IFRS 3. No changes were made to the BPI Group’s consolidation perimeter as a consequence of the period of turbulence in the financial markets.
21. Exposure to “mono-line” insurers and quality of insured assets
At 31 December 2009, BPI’s exposure to mono-line insurers was totally indirect and stemmed from the existence of portfolio positions whose interest and principal were unconditionally guaranteed by this type of company. There were no losses worth noting, given that none of these securities were in default.
At the end of 2009, BPI exposure to mono-line insurers amounted to 66.7 M.€ (book value).
V. ACCOUNTING AND VALUATION POLICIES
22. Classification of transactions and structured products for accounting purposes and the respective accounting treatment The note to the financial statements “2.2. Financial assets and liabilities”, the accounting criteria used in the recognition and valuation of financial assets and liabilities are described.
BPI’s investments in structured products (namely SIVs and ABS) were included in the debt securities portfolio and in
available-for-sale assets (notes to the financial statements 2.2.3.
and 2.2.4.).
The debt securitisationGoperations originated by BPI are recognised in financial liabilities associated with transferred assets (notes to the financial statements 2.2.4. and 4.19.).
NFS – 2.2. Financial assets and liabilities, page 137; 2.2.3.
Financial assets available for sale, page 138; 2.2.4. Loans and other receivable, page 139; 4.19. Financial liabilities relating to transferred assets, page 180.
23. Consolidation of Special Purpose Entities (SPE) and other vehicles and their reconciliation with the structured products affected by the turbulent period
The vehicles through which Banco BPI’s debt securitisation operations are effected are recorded in the consolidated financial statements according to the BPI Group’s continued involvement in these operations, determined on the basis of the percentage of the equity piece held of the respective vehicles.
24. Detailed disclosure of the fair value of financial instruments
The note to the financial statements “4.48. Financial risks”
presents details of the estimated fair value for virtually all of the BPI Group’s financial assets and liabilities at 31 December 2009.
NFS – 4.48. Financial risks, page 201 and following.
25. Description of the modelling techniques utilised for valuing financial instruments
The notes to the financial statements “2.2. Financial assets and liabilities” and “4.48. Financial risks” describe the techniques utilised in valuing financial instruments.
NFS – 2.2. Financial assets and liabilities, page 137 and 4.48.
Financial risks, page 201 and following.
VI. OTHER IMPORTANT DISCLOSURE ASPECTS
26. Description of disclosure policies and principles which are used in financial reporting
In the BPI Group’s Corporate Governance Report, in chapter “10.
Communication with the market”, detailed information is provided regarding the principles of financial information disclosure and the communication channels used, the Investor Relations Division’s terms of reference and the activity carried out in the year.
CGovR – Communication with the market, page 323.
DR – Directors’ Report; NFS – Notes to the financial statements; CGovR – BPI Group’s Corporate Governance Report.
Report | Rating 121
Rating
2009 saw the international rating agencies follow through on changes to their analysis methodologies, as well as on several revisions to their sovereign and corporate debt rating notations, most of them on the downside. At the end of the year, BPI was the only Iberian bank holding
the same short and long-term ratingGnotations as the ones held before the start of the financial crisis, in June 2007, for all agencies considered, thus improving its relative position within the Iberian banking landscape.
Fitch Ratings