This section sets out the information required by IFRS 7 regarding risk exposures arising from financial instruments.
The figures provided in this section have been audited, except for those contained in sections specifically marked with an asterisk(*), which have been checked for accuracy and consistency as stipulated in Article L.823-10 of the French Commercial Code, as has the rest of the board of directors’ report.
Periodic and permanent control functions and a compliance function provide strict oversight of processes across all business activities.
The risk management department consolidates overall risk control and optimizes risk management with respect to the regulatory capital allocated to each business and return on equity.
III.3.1 – Credit risk
III.3.1.1 – Organization of the lending unit
In accordance with applicable regulations, the lending unit is organized mainly around the two following mechanisms: – loan origination procedures; and
– risk assessment, the monitoring of commitments and management of at-risk items.
The lending unit and exposure management are organized based on a single set of guidelines that prescribes the rules and practices applicable within the group.
III.3.1.1.1 – Loan origination procedures
Loan origination is based on know-your-customer, risk assessment and commitment decision procedures.
Know-your-customer
The group relies on the close ties it has established in the communities in which it operates as the basis for obtaining information about existing and prospective customers, which the group places into several risk-based categories that help determine the targeting of marketing efforts. A loan file is prepared to support the loan origination process.
Risk assessment
Risk assessment is based on several analyses performed at different stages in the lending cycle including, in particular: – customer ratings;
– risk groups; and
– the weighting of products in accordance with the type of risk involved and collateral and guarantees pledged. The relevant group employees receive periodic training on risk management and assessment.
Customer ratings: a single system for the entire group
In accordance with the applicable regulations, the group’s internal customer rating system is at the core of the group’s credit risk procedures, which is used in determining approval, payment, pricing and monitoring. All loan origination decisions are based on the counterparty’s rating. The lending unit approves the internal ratings of all loan files for whch it is responsible.The group has developed rating algorithms and expert models to improve its credit risk assessment and to comply with the regulatory requirements concerning approaches to internal rating.
This rating system is common to the entire Crédit Mutuel group.
The Confédération Nationale du Crédit Mutuel (CNCM) is responsible for defining the rating methodologies for all portfolios. Never- theless, the regional entities are directly involved in carrying out and approving working parties’ assignments on specific subjects and the work related to data quality and application acceptance tests.
The group’s counterparties that are eligible for internal assessment are rated by a single system.
Models (algorithms or grids) are used to differentiate and correctly classify risk. The assessment scale reflects the manner in which the risk changes and is broken down into nine non-default positions (A+, A-, B+, B-, C+, C-, D+, D- and E+) and three default positions (E-, E= and F).
Monitoring of the rating models focuses on three aspects: stability assessment, performance and additional analyses. CNCM is responsible for this monitoring, which covers each rating model.
Risk groups (counterparties)
Individuals or legal entities that are related in such a way that if one of them encounters financial problems it is likely that the others will follow are considered as a single beneficiary.
The risk groups are established based on a procedure that incorporates the provisions of Article 3 of CRBF regulation 93-05.
Product and guarantee weightings
When assessing the counterparty risk, the Group may apply a weighting of the nominal commitment, based on a combination of the loan type and the nature of the guarantee.
Loan origination process
The loan origination process is essentially based on: – a formalized risk analysis of the counterparty;
– the internal rating applied to the counterparty or group of counterparties; – whether the loan falls below the relevant cap;
– review of the loan file by a separate team under the group’s dual review principle;
– whether the loan falls within maximum discretionary lending limits that have been determined in proportion to the local lending bank’s equity;
– whether the interest rate and other fees are adapted to the risk profile of the loan and capital consumption.
The group uses an automated decision-making circuit is automated conducted in real-time. Immediately upon completion of a loan application, the electronic loan file is automatically transmitted to the applicable decision maker at the appropriate level.
Approval levels
The customer relationship manager is responsible for ensuring the completeness, quality and reliability of the information collected. In accordance with Article 19 of CRBF regulation 97-02, the manager compiles loan files intended to formalize all qualitative and quan- titative information on each counterparty. The manager checks the reliability of the information gathered either with customers or using any external means (sector studies, annual reports, legal information and rating agencies) or internal means at the manager’s disposal. Each customer relationship manager is responsible for any decision the manager takes or causes to be taken and is endowed with personal approval powers.
For loan files whose amount exceeds the personal approval powers, the decision falls to a Loan Origination Committee whose operating rules are set by procedures.
Approval powers reflect a range of commitment caps based on: – the rating;
– the total amount of commitments for a given counterparty or risk group, weighted where relevant depending on the type of loan concerned or the eligible guarantees;
– any specific exclusions.
Role of the lending unit
The lending unit is present at various operational levels. Coordination of the unit and involvement in the key tasks and files are exercised from Strasbourg (CM) and Paris (CIC). Specialized teams located in the regional departments and in each regional bank also provide a regional presence wherever the CM11-CIC operates.
The lending unit has two key roles and is therefore split into two independent teams, whose responsibilities are as follows: – one team is responsible for checking that the loan origination decisions are appropriate based on the dual review principle while verifying that the expected return is commensurate with the risk taken;
– the other team is responsible for prudential oversight and credit risk assessment arrangements, and also for the performance of permanent controls.
III.3.1.1.2 – Risk assessment, commitment monitoring procedures and management of at-risk items
In accordance with the applicable regulations, the group’s commitments are monitored by national and regional entities.
Risk assessment
To assess risk, CM11-CIC group uses an array of tools that provide an aggregated, static and dynamic view of: – the exposure to a given counterparty or group of counterparties;
– new and existing loans, based on elements adapted to suit the business lines concerned (rating, market, lending products, business segments, remuneration, etc.).
Each commercial entity uses information systems that enable it to check compliance on a daily basis with the caps assigned to each of its counterparties.
Commitment monitoring
Together with other interested parties, each lending unit contributes to the quarterly, formalized monitoring of the quality of the credit risk of each business line. This monitoring is conducted independently from the loan origination process and is in addition to and in coordination with the actions taken mainly by the first-level control in the lending units, the permanent supervision procedures and the Risk Department. The objective of the monitoring is to identify as early as possible at-risk situations using specific criteria for each customer segment, either through software applications or through the relevant operations and commitments managers.
The group also conducts internal reviews of counterparties to set “major risks” limits, determined based on either the bank’s equity under CRBF regulation 93-05 in the case of regulatory limits, or equity and internal counterparty ratings in the case of corporate limits.
Advanced risk detection tools (management of debtors/sensitive risks/automatic transfer to the out-of-court collections unit) are also used to monitor account functioning anomalies and overruns, on the basis of both external and internal criteria, in an automated, systematic and comprehensive manner. These criteria are used to identify loans for special handling as early as possible.
A permanent network control function, independent of the lending function, performs second level controls on credit risk that review counterparties exhibiting warning signs and identify entities with multiple negative indicators. The aim of the second level control is to ensure that appropriate “risk” strategies are applied and suitable remedial action implemented.
Management of at-risk items
A unified definition of default based on Basel and accounting requirements
The entire Crédit Mutuel group uses a unified definition of default, which draws a correlation between the Basel concept of default and the accounting notion of non-performing loans and loans in litigation as a result of an alignment of prudential rules to accounting regulations (CRC 2002-03). The computer applications take contagion into account, which also allows related loans to be downgraded.
Identification of at-risk items
The objective of the process is to identify all loans to be placed on credit watch and allocate them to the applicable category: sensitive (not downgraded), non-performing or in litigation. All loans are subject to an automatic monthly identification process using internal and external indicators that have been parameterized in the information system. Downgrading, in accordance with the prevailing regulatory criteria, is carried out automatically.
Transfer to non-performing, provisioning and reclassification as performing
Adjustments associated with the transfer to non-performing, provisioning and the reclassification as performing comply with the prevailing applicable rules and are processed automatically on a monthly basis, which ensures the process is exhaustive.
Management of doubtful loans
The group deals with doubtful loans depending on the severity of the situation. Management of such customers could remain at the branch level under the supervision of the customer relationship manager or be handled by specific, specialized staff, in accordance with the market, counterparty type or collection method.
Reporting
Risk CommitteeIn accordance with the provisions of CRBF regulation 97-02, the different decision-making bodies, particularly the Risk Committee, are informed of the evolution of lending commitments periodically and at least on a quarterly basis. In addition, these bodies are informed of and participate in decisions concerning the changes affecting the management systems of the credit commitments.
Information provided to management
IDetailed information on credit risks and related procedures is presented to the general management. This information is also pre- sented to a Risk Monitoring Committee in charge of examining the strategic challenges faced by the CM11-CIC group in terms of risks, in accordance with applicable regulations.
III.3.1.2 – Quantified data
III.3.1.2.1 – Summary credit-risk exposure (balance sheet and off-balance sheet)
The additions to the scope of consolidation used to calculate the constant scope include the federation of Credit Mutuel Anjou.
Exposure
In e million, year-end principal balances Dec. 31, 2012
Dec. 31, 2012 at constant
scope Dec. 31, 2011 Loans & receivables
Credit institutions 52,802 52,787 37,775 Customers 276,009 272,585 270,738 Gross exposure 328,811 325,372 308,513 Impairment provisions Credit institutions - 280 - 280 - 310 Customers - 7,392 - 7,360 - 7,564 Net exposure 321,138 317,732 300,639
Exposure on commitments given
In e million, year-end principal balances Dec. 31, 2012
Dec. 31, 2012 at constant
scope Dec. 31, 2011 Financing commitments given
Credit institutions 1,620 1,620 1,626
Customers 47,882 47,638 52,107
Guarantee commitments given
Credit institutions 1,323 1,323 2,265
Customers 13,800 13,769 13,677
Provision for risks on commitments given 144 125 139
Source : Accounting - excluding repurchase agreements.
III.3.1.2.2 – Customers loans
Total loans to customers amounted to e276.0 billion, up 0.7% 1 compared to 2011. Medium- and long-term loans on the balance
sheet increased by 2.1% 1, while short-term loans decreased by 3.7% 1.
In e million, year-end principal balances Dec. 31, 2012
Dec. 31, 2012 at constant
scope Dec. 31, 2011
Short-term loans 59,255 59,003 61,239
Overdrawn current accounts 8,085 8,037 6,993
Commercial loans 4,774 4,767 5,158
Short-term credit facilities 45,929 45,733 48,584
Export credits 466 466 503
Medium- and long-term loans 204,749 201,679 197,573
Equipment loans 45,641 44,917 42,526
Housing loans 140,748 138,626 137,216
Finance leases 8,405 8,405 8,294
Other 9,955 9,731 9,538
Total gross customer loans,
excluding nonperforming loans and accrued income 264,003 260,682 258,811
Non-performing loans 11,434 11,337 11,335
Accrued income 572 566 591
Total gross customer loans 276,009 272,585 270,738
Source : Accounting - excluding repurchase agreements.
At the end of 2012, the agregate loan book reflects the full consolidation of the federation of Credit Mutuel Anjou. For this entity, the outstanding amounts at the end of 2012 broke down as follows:
In e million, year-end principal balances
Dec. 31, 2012 first-time consolidation Dec. 31, 2012 relative weight Short-term loans 252 7.6%
Overdrawn current accounts 48 1.4%
Commercial loans 7 0.2%
Short-term credit facilities 196 5.9%
Medium- and long-term loans 3,070 92.4%
Equipment loans 724 21.8%
Housing loans 2,122 63.9%
Finance leases 0 0.0%
Other 224 6.7%
Total gross customer loans,
excluding nonperforming loans and accrued income 3,321 100%
Non-performing loans 97
Accrued income 6
Total gross customer loans 3,424
Impairment provisions 32
Source : Accounting - excluding repurchase agreements.
Unless otherwise specified, the comments, outstanding loans and analyses set out below (except for the “Housing loans” and “Geographical risk” sections) do not include Targobank Germany, the Cofidis Group, Targobank Spain and Banque Casino.
Quality of the portfolio
The loan portfolio is of high quality. On a nine level internal rating scale (excluding defaults), customers in the eight best categories accounted for 97.8% of the outstanding loans.
Performing loans to customers by internal rating Dec. 31, 2012 in % Dec. 31, 2011 in %
A+ and A- 35.2% 33.2%
B+ and B- 32.8% 33.0%
C+ and C- 20.8% 22.0%
D+ and D- 8.9% 9.7%
E+ 2.3% 2.1%
Source : Risk Management.
CM-CIC rating equivalentMoody’s Standard & Poor’s equivalent
A+ AAA to Aa1 AAA to AA+
A- Aa2 to Aa3 AA to AA-
B+ A1 to A2 A+ to A B- A3 to Baa1 A- to BBB+ C+ Baa2 BBB C- Baa3 BBB- D+ Ba1 to Ba2 BB+ to BB D- Ba3 to B1 BB- to B+ E+ B2 and < B and <
Focus on home loans
Outstanding amounts of home loans increased by 1% 1 in 2012 and accounted for 53% of the total gross balance sheet customer
loans. Home loans are divided among a very large number of customers and are backed by real property sureties or first-rate guarantees.
In e million, year-end principal balances Dec. 31, 2012 Dec. 31, 2011
Housing loans 140,748 137,216
Secured by Crédit Logement or Cautionnement Mutuel Habitat 46,931 46,441 Secured by mortgage or equivalent, low-risk guarantee 71,300 68,684
Other guarantees 1 22,517 22,091
Source : Accounting. 1. Other risk-level mortgages, pledges…
Breakdown of loans by customer type
The breakdown of loans by customer type set forth below includes all the entities of CM11-CIC group located in France.
Dec. 31, 2012
in % Dec. 31, 2011 in %
Retail 79% 78%
Corporates 18% 17%
Large corporates 2% 3%
Specialized financing and other 2% 2%
Source : Risk Management.
Geographical breakdown of customer risk
99% of the identified country risk is in Europe. With marginal exceptions, the country risk exposure of the portfolio is centered on France and OECD countries.
Dec. 31, 2012
in % Dec. 31, 2011 in %
France 91% 90%
Europe, excluding France 8% 8%
Rest of the world 1% 1%
Source : Accounting.
Concentration risk / Exposure by segment
Concentration risk and exposure by segment are addressed in the chapter “Information on Basel II pillar 3”.
Major risks
CorporateConcentration of customer credit risk Dec. 31, 2012 Dec. 31, 2011
Gross commitments in excess of e300m
Number of counterparty groups 40 40
Total commitments (em) 24,464 25,685
of which total statement of financial position (em) 9,138 9,585
of which total off-statement of financial position
guarantee and financing commitments (em) 15,326 16,100
Gross commitments in excess of e100m
Number of counterparty groups 137 125
Total commitments (em) 39,282 39,785
of which total statement of financial position (em) 16,767 16,555
of which total off-statement of financial position
guarantee and financing commitments (em) 22,516 23,229 Source : DGR 4003.
Gross commitments: weighted uses statement of financial position + offstatement of financial position guarantee and financing commitments.
Banking
Concentration of customer credit risk Dec. 31, 2012 Dec. 31, 2011
Gross commitments in excess of e300m
Number of counterparty groups 11 16
Total commitments (em) 8,266 14,749
of which total statement of financial position (em) 6,737 11,441
of which total off-statement of financial position
guarantee and financing commitments (em) 1,529 3,308
Gross commitments in excess of e100m
Number of counterparty groups 28 31
Total commitments (em) 11,472 17,683
of which total statement of financial position (em) 9,436 13,685
of which total off-statement of financial position
guarantee and financing commitments (em) 2,037 3,998 Source : DGR 4003.
Gross commitments: weighted uses statement of financial position + offstatement of financial position guarantee and financing commitments.
At-risk items and cost of risk
The CM11-CIC group’s doubtful loans remained stable on a comparable basis, with e11.434 billion at 31 December 2012 compared
with e11.335 billion at 31 December 2011. These loans accounted for 4.1% of total customer loans compared with 4.2% in 2011.
At the end of 2012, actual net provisioning for known risks represented 0.351% of gross outstanding customer loans, compared with 0.380% at 31 December 2011. The cost of total customer risk, which includes provisions for collectively impaired receivables, amounted to 0.369% of the gross outstanding amount of customer loans, compared with 0.373% at 31 December 2011. The table below summarizes the main components.
Cost of risk
Dec. 31, 2012 Dec. 31, 2011
Cost of total customer risk 0.369% 0.373%
Banking networks 1 0.15% 0.12%
Private individuals 0.07% 0.07%
Housing loans 0.06% 0.04%
Consumer credit - Targobank Germany 1.57% 1.92%
Consumer credit - Cofidis 3.92% 4.48%
Financing 2 0.48% 0.14%
Private banking 0.31% 0.09%
1. CM11 scope, CIC, BECM, CIC Iberbanco, Targobank Spain (excluding Targobank Germany, Cofidis and support subsidiaries in the network). 2. Large corporates, International (incl. foreign branches), Specialized financing.
Quality of customer risks
In e million, year-end principal balances Dec. 31, 2012
Dec. 31, 2012 at constant
scope Dec. 31, 2011
Individually impaired receivables 11,434 11,337 11,335
Provision for individually impaired receivables 6,815 6,786 7,038
Provision for collectively impaired receivables 577 574 526
Coverage ratio 64.7% 64.9% 66.7%
Coverage ratio (provision for individual impairments only) 59.6% 59.9% 62.1%
Outstanding loans to customers taht are overdue but not impaired
Dec. 31, 2012 < 3 months > 3 months < 6 months > 6 months < 1 year > 1 an Total
Debt instruments 1 0 0 0 0 0
Loans & receivables 5,261,169 40,200 11,193 15,740 5,328,302
Governments 699 0 0 0 699 Credit institutions 9,863 0 0 0 9,863 Non-financial institutions 40,480 0 0 0 40,480 Large corporates 677,576 1,196 5,323 10,440 694,535 Retail customers 4,532,551 39,004 5,870 5,300 4,582,725 Total 5,261,169 40,200 11,193 15,740 5,328,302
Dec. 31, 2011 < 3 months > 3 months < 6 months > 6 months < 1 year > 1 year Total
Debt instruments 1 0 0 0 0
Loans & receivables 4,141,484 47,201 1,367 2,377 4,192,429
Governments 3,562 0 0 0 3,562 Credit institutions 17,824 0 0 0 17,824 Non-financial institutions 26,714 0 0 0 26,714 Large corporates 520,178 1,905 0 2,333 524,416 Retail customers 3,573,206 45,296 1,367 44 3,619,913 Total 4,141,484 47,201 1,367 2,377 4,192,429
1. Available-for-sale or held-to-maturity debt securities.
III.3.1.2.3 – Interbank loans*
Interbank loans by geographical region
Dec. 31, 2012
in % Dec. 31, 2011 in %
France 43.1% 47.6%
Europe, excluding France 34.2% 31.7%
Other countries 22.7% 20.7%
Source : Counterparty Financial Information Department. Banks only, excluding Targobank Germany, Targobank Spain and Cofidis.
Interbank loans are classified by the country of the parent company.
At the end of 2012, interbank loan exposures related mainly to banks in France, the United States and Germany. The CM11-CIC group continued to reduce its exposure in the most sensitive European banking systems during 2012.
Structure of interbank exposure by internal rating
Equivalent
external rating Dec. 31, 2012 in % Dec. 31, 2011 in %
A+ AAA/AA+ 0.1% 0.4%
A- AA/AA- 32.5% 25.4%
B+ A+/A 43.3% 52.5%
B- A- 10.3% 12.7%
C and below BBB+ and below 13.5% 8.9%
Not rated 0.3% 0.0%
Source : Counterparty Financial Information Department. Banks only, excluding Targobank Germany, Targobank Spain and Cofidis.
In 2012, the change in the structure of CM11-CIC’s interbank exposure based on the internal rating was marked by: – an increase in amounts owed rated A- (external equivalent AA/AA-), concentrated in a few leading
French and European counterparties;
– an increase in amounts owed by the weakest counterparties (rated C+ or less, i.e. external equivalent BBB+), due to the deterioration in the scores of counterparties located in sensitive countries; and
– and a significant decrease in amounts owed rated B+ (external equivalent A+/A) due to the aforementioned downgrades as well as to