General aspects

Banca IFIS Group’s activity is based mainly on the purchase of enterprises’ receivables and is characterised by the direct assumption of risks related to granting advances and loans, as well as guarantees, on the receivables of enterprises, mainly small and medium enterprises, in actuation of expansion strategies defined and pursued by the group. Given the particular activity that the group carries out, credit risk is the most important element to consider as far as concern the general risks assumed by the group. The maintenance of effective credit risk management is a strategic objective for the Banca IFIS Group and this strategy is being pursued through the adoption of tools and processes that ensure correct credit risk management in all its phases (initial dossier and paperwork, granting of advances and loans, monitoring and management and intervention in problematic credit). No changes to the objectives and strategies underpinning traditional credit activities took place over 2010.

In the face of surplus liquidity, the Banca IFIS Group carries out operations involving very short-term deposits with highly creditworthy banking counterparts. Given the counterparts involved, the short duration of the transactions and the contained amounts involved, the credit risk connected to this activity is particularly low.

During 2010 purchases continued of bonds which are classified under available for sale financial assets and under loans and receivables. This financial activity which, given its classification, is recognised in the banking book even if it is different from the bank’s traditional activity, gives rise to credit risk. The risk lies in the inability of the issuer to redeem the bond securities, partially or in full, at their maturity. The bonds purchased by the Banca IFIS Group therefore consist almost entirely of Italian Government bonds and banking bonds which are in the investment grade, eligible category and have an overall average maturity of less than eighteen months and a maximum maturity per individual asset, of just under five years.

The purchase of bonds does not represent a change in the Group’s strategic direction, but reflects the need to protect itself against liquidity risk arising from the potential volatility of the online funding introduced with the Rendimax account and from the potential instability seen on the traditional interbank market in recent years. The establishment of an asset portfolio that can be rapidly turned into liquidity also meets the need to act in advance of the increasingly strict prudential regulation in regard to the governance and management of liquidity risk (Basel 3).

The Banca IFIS Group does not carry out any activity involving derivative products on loans.

Credit risk management policies

Organisational aspects

Credit risks are generated as a direct consequence of financing the customer’s enterprise and granting, where requested, guarantees against losses caused by debtor insolvency. Credit risk management takes place during two specific phases of the credit process: the initial credit assessment phase of the operation and, if the assessment has a positive outcome, during the entire relationship with the assignor/debtor counterparties. In order to maximize the quality of Banca IFIS Group’s portfolio, the bank has chosen, through the specialisation of resources and separation of functions at every decisional phase, to concentrate all the phases of credit risk assumption and management at Head Office, thus allowing for a high level of homogeneity in granting credit and strict monitoring of individual positions. This is also true for IFIS Finance, whose decisions are taken within the limits defined by the parent company, Banca IFIS.

In the first phase of the risk management process, the organisational structure responsible for such activities has the responsibility of assessing the creditworthiness of the assignor and debtor counterparties, the nature of the commercial relationship between the counterparties and the quality of the receivables to be assigned. A multi-level system of delegation and decisional powers gives the analysts with the most experience the possibility to assume risks of substantial importance in terms of size, albeit still contained. Greater risks can be taken on by service and area managers. As for higher amounts, powers are attributed solely to the Chief Operating Officer, the Chief Executive Officer, the Loan Committee and, finally, the Board of Directors.

The bank’s branches do not have decisional powers in the assumption of credit risk. Rather, they have the responsibility of developing business throughout the territory and managing relationships with customers. Being this the case, within the limits and formalities established by Headquarters’ managerial bodies and under its constant monitoring, branches have the possibility to grant advances as part of ordinary operations with customers.

As far as concerns credit risks at group level, IFIS Finance carries out its activity respecting the strategic indications and risk policies defined by the parent company, Banca IFIS.

Qualified and specialised staff follow all aspects of a relationship’s evolution: from the assignment of the receivables to the granting of advances, from the administrative management of the receivables to their collection, from the individuation of possible anomalies to the verification and definition of the most opportune initiatives for credit recovery together with support from the Legal Department, if necessary.

The Banca IFIS Group pays particular attention to the concentration of credit risks. Banca IFIS’s Board of Directors has delegated Top Management to take action to contain large risks. In line with the Board of Directors’ instructions, all large credit risks, even if amounting to less than 10% of regulatory capital, are systematically monitored.

Management, measurement and control systems

The operational procedure governing Banca IFIS Group’s credit process requires the punctual and analytical assessment of all the counterparties involved in the factoring relationship, both on the assignor side and on the assigned debtor side.

Banca IFIS Group’s operations do not involve the assumption of credit risks based on a statistical approach.

Credit risk is constantly controlled by operational procedures that can rapidly individuate anomalies.

Banca IFIS Group’s main instrument of assessment and control is the Internal Rating System (IRS). During the assessment stage, the IRS allows analysts to:

  • give the assignor and the debtor a credit standing and counterparty rating;

  • immediately individuate the risk in each individual operation, granting advances or financing;

  • define adequate pricing for each class of risk, right from initial analysis of the feasibility of the operation.

Once the stages of assessment and the initiation of the relationship have been successfully completed, the IRS, fed information by selected databases, allows the credit risk connected to the counterparties acquired to be constantly monitored.

Disputes, prejudicial matters or identification of non-performing loans automatically lead to blocks on operations. Consequential analysis aims to evaluate the seriousness of the anomalies identified and the permanence of the difficulties encountered and in this way aid in deciding whether to progress with the relationship or otherwise.

At present, due to the type of databases used (Central Credit Risks Bureau, disputes and judicial records, etc.), the IRS is only fully operational, in both the assessment and monitoring phases, for domestic counterparties or those with Italian offices. For other counterparties, assessment is carried out based on financial statement analysis and, if the counterparty has relationships with other Italian banks, through the Central Credit Risks Bureau form.

As far as concerns the credit risk connected to the portfolio of bond securities, remembering that it is mainly made up of Italian government securities and investment grade, short-term bank bonds, the Banca IFIS Group is constantly committed to monitoring the credit quality of the issuers of these bonds. The composition of the bond portfolio is periodically reported upon by the Risk Management Office to the bank’s Board of Directors and to Top Management.

Under the Basel 2 Accord for calculating capital requirements in the face of first pillar credit risks, the bank has chosen to use the Standardised method.

Risk mitigation techniques

Wherever the type and/or quality of assigned receivables do not fully satisfy requirements or, more generally, the assigning customer is of insufficient creditworthiness, it is consolidated policy for the bank to obtain maximum protection against the credit risk assumed by obtaining additional surety guarantees from the assignor’s company’s shareholders or directors.

As far as concern assigned debtors, wherever the bank believes that the elements available for assessment of the assigned debtor are not sufficient for the correct evaluation / assumption of the connected credit risk, or the proposed amount of risk exceeds the limits identified during the debtor assessment, the bank will obtain the necessary coverage against assigned debtor default. Guarantees granted by correspondent factors and/or insurance policies undersigned with specialised operators are very common in non-recourse operations with non-domestic assigned debtors.

Impaired loans and receivables

Operations and relationships with customers are constantly monitored by the competent office at Headquarters, both by means of trends in relationships and by monitoring the counterparties (through the Central Credit Risks Bureau, disputes, judicial records etc.). In cases of anomalous trends or counterparty disputes, the situation is placed under observation and the management of operations by the individual branch is directly supervised by Head Office’s Credit Management Area until such problems have been overcome.

In cases where the situation deteriorates or becomes critical, management of the entire operation passes to Head Office’s Credit Management Area, with the possible support of the Legal Department, with the aim, based on in-depth evaluation, of maintaining the position under supervision until the problems have been overcome and the situation returns to normal. Based on available information, possible classification under non-performing loans or substandard loans is also assessed.

Management of impaired positions, whether they be substandard loans or non-performing loans, normally falls under the responsibility of the Legal Department which initiates action for protection against these and their recovery should they occur, periodically reporting back to Top Management and the Board of Directors. If it is believed that there will be a positive outcome to the problems encountered by the assignor or the debtor with the bank remaining protected against the credit risk, the loan may be rescheduled and placed, once again, under the management and monitoring of Head Office’s Credit Management Area.

Impairment losses/reversals of impairment losses on loans, proposed by the Legal Department, are effected by Top Management and subject to resolution by the Board of Directors.

As a rule, the same process is activated at group level, but it is important to keep in mind the marginal presence of impaired assets in the subsidiary.