| Financial instruments risks | 39. Financial instruments risks Presentation of Risk Management and Risk-Weighted Assets (RWA) Strategies and processes The General Risks Policy expresses the levels and types of risk the Group is willing to take to carry out its strategic plan, with no relevant deviations, even under stress conditions. To achieve its goals, the Group uses a management model with two principles for the decision-making process: • Prudence: Materialized in relation to the management of the various risks acknowledged by the Group. • Anticipation: refers to the adaptation capacity of risk management . This process aims to be adequate, sufficiently proven, duly documented and periodically reviewed based on the changes of the Group’s risk profile and the market. Structure and organization The Group has a formal organizational structure, with a set of roles and responsibilities, organized in a pyramidal structure that generates control instances from lower to higher levels, up to the highest decision-making bodies. The following are the areas that conform the structure and a list of their functions: • Risks Management Unit • Committees • Control and Reporting Units • Cross-Control Areas Risks Management Unit: This is an area that is independent from business units, in charge of implementing the criteria, policies and procedures defined by the organization within the scope of credit (retail and wholesale), operational and market risk management, with a follow-up s • Active management throughout the life of the risk. • Clear processes and procedures. • Integrated management of all risks through identification and quantification. • Generation, implementation and dissemination of advanced decision-making support tools. Committees Committees are the instances through which risks are treated. BBVA Argentina has an agile and proper structure of committees for the management of the various risks. Internal Risk Control Unit The main responsibilities of Internal Risks Control Area are: ensuring there is a proper internal regulatory framework (a process and measures defined for each type of risks), controlling its application and operation, and ensuring an assessment of the existence of a control environment and its proper implementation and operation. The area has a Models Validation team that ensures the adequate use of BBVA Argentina’s internal risk statistical models and is responsible for issuing an informed and updated opinion on the proper use of such models. Reporting Units The Reporting Units are in charge of control procedures for risk, determining the risk quota for each segment of economic activity and type of financing, preparing fundamental metrics setting forth the principles and general risk profile in the statement of Appetite for Risk. In addition, it is in charge of generating reports for the Risks Management for decision-making process in accordance with internal credit policies and control organizations’ policies, reviewing processes and proposing alternatives. Cross-Control Areas The Group also has cross-control areas, such as: Internal Audit, Regulatory Compliance and Internal Control. Risk Appetite Framework Risk appetite is a key element providing the Group with a comprehensive framework to determine the risks and level of risks, expressed in terms of capital, liquidity, profitability, income recurrence, risks costs or other metrics. Risk appetite is expressed through a statement containing the general principles for the Group’s strategy and quantitative metrics. Stress Testing The evaluation of the Group’s financial position under a severe but plausible scenario requires the simulation of scenarios to estimate the potential impact on the value of portfolios, profitability, solvency and liquidity. Credit risk It is the most important risk for the Group and includes counterparty risk, issuer risk, settlement risk and country risk management. Strategy and processes BBVA Argentina develops its credit risk strategy defining the goals that will guide its granting activities, the policies to be adopted and the necessary practices and procedures to carry out those activities. Additionally, the Risks Management Department, together with the rest of the Bank’s Management Departments, annually develops a budget process, which includes the main variables of credit risk: • Expected growth per portfolio and product. • Evolution of default ratio. • Evolution of write-off This way, the expected standard credit risk values are set for a term of one year. Afterwards, the real values obtained are compared with that budget, to assess the growth of the portfolio and its quality. Also, maximum limits or exposures per economic activity are formalized, pursuant to the Group’s placement strategy, which are used to follow up credit portfolios. In case of deviations from the set limits, these are analyzed by the Risks Follow-Up Origination BBVA Argentina has credit risk origination policies, to define the criteria to obtain quality assets, establish risk tolerance levels and alignment of the credit activities with the strategy of BBVA Argentina and in accordance with the Group. The policy of accepting risks is therefore organized into three different levels in the Group: • Analysis of the financial risk of the transaction, based on the debtor’s capacity for repayment or funds generation. • The constitution of guarantees that are adequate, or at any rate generally accepted, for the risk assumed, in any of the generally accepted forms: monetary, secured, personal or hedge guarantees; and finally. • Assessment of the repayment risk (asset liquidity) of the guarantees received. Monitoring The main monitoring procedures carried out for the various Banking areas are: • Monitoring of the limit granted: Since customer profiles vary over time, the limits of products contracted are periodically reviewed for the purpose of broadening, reducing or suspending the limit assigned, based on the risk situation. • Maintenance of pre-approved pre-approved follow-up pre-approved • Monitoring of rating tools: Rating tools are a reflection of the internal inputs and show the characteristics and biases of such inputs. Therefore, they need a long period of use to reduce or eliminate those biases through the inclusion of new information, correction of existing information and periodic reviews optimizing the results of back-tests. • Portfolio analysis: The portfolio analysis consists of a monitoring process and study of the complete cycle of portfolios risk for the purpose of analyzing the status of the portfolio, identifying potential paths towards improvements in management and forecasting future behavior. Additionally, the following functions are carried out: • Monitoring of specific customers. • Monitoring of products. • Monitoring of units (branches, areas). • Other monitoring actions (samples, control of admission process and risk management, campaigns). The priority in credit risk monitoring processes is focused mainly on problematic or potentially problematic customers for preventive purposes. The remaining aspects, the monitoring of products, units and other monitoring actions, are supplementary to the specific monitoring of customers. Recovery BBVA Argentina has also a Recoveries Area within Risks Management, to mitigate the severity of credit portfolios as well as to provide the results directly through collections of Write-Off Scope and nature of information and/or risk measurement systems BBVA Argentina has several tools to be used in credit risk management for effective risk control and facilitating the entire process. The periodic reports are: • Progress of Risks. • Payment Schedules. • Ratings. • Dashboard. • Early Alerts System. • Quarterly tools follow-up Exposure to credit risk The Group’s credit risk exposure of loans and advances under IFRS 9 with stage allocation by asset classification as of December 31, 2019 is provided below: Credit risk exposure December 31, Stage 1 Stage 2 Stage 3 Financial assets at amortized cost 208,136,419 180,258,699 20,095,905 7,781,815 Wholesale 89,424,896 77,935,136 6,931,687 4,558,073 - Business 46,694,798 38,163,038 4,645,863 3,885,897 - CIB 40,226,136 38,286,185 1,340,985 598,966 - Institutional and international 573,958 314,300 259,307 351 - SME 1,930,004 1,171,613 685,532 72,859 Retail 118,711,523 102,323,563 13,164,218 3,223,742 - Advances 465,760 289,925 109,759 66,076 - Credit Cards 68,713,781 59,890,267 7,202,845 1,620,669 - Personal Loans 24,378,544 18,035,567 4,982,391 1,360,586 - Pledge Loans 9,612,796 9,274,034 192,066 146,696 - Mortgages 15,374,658 14,672,320 675,023 27,315 - Receivables from financial leases 165,005 160,728 2,063 2,214 - Others 979 722 71 186 Financial assets at fair value through other comprehensive income 45,212,713 29,146,833 16,065,880 — - Debt Securities 45,212,713 29,146,833 16,065,880 — Total financial assets risk 253,349,132 209,405,532 36,161,785 7,781,815 Credit risk exposure December 31, Stage 1 Stage 2 Stage 3 Loan commitments and financial guarantees 49,707,760 44,812,582 4,862,443 32,735 Wholesale 12,394,826 9,647,220 2,743,101 4,505 - Business 9,003,091 7,780,502 1,219,808 2,781 - CIB 1,723,903 757,230 966,450 223 - Institucional e Internacional 1,219,678 784,922 434,756 — - Pymes 448,154 324,566 122,087 1,501 Retail 37,312,934 35,165,362 2,119,342 28,230 - Advances 3,966,981 3,833,915 131,488 1,578 - Credit Cards 33,066,498 31,079,149 1,960,697 26,652 - Mortgages 247,141 230,335 16,806 — - Others 32,314 21,963 10,351 — Total loan commitments and financial guarantees 49,707,760 44,812,582 4,862,443 32,735 Total credit risk exposure 303,056,892 254,218,114 41,024,228 7,814,550 Information on the credit quality of assets The Group has made improvements in its disclosures for the current year with respect to those made in 2018, therefore the information on the credit quality of assets is disclosed in accordance as is detailed in the following paragraph. The Group’s credit quality analysis of loans and advances under IFRS 9 with risk allocation as of December 31, 2019 is provided below: Credit quality analysis December 31, 2019 Retail - Low Risk 109,688,718 - Medium Risk 39,920,311 - High Risk 2,781,678 - Non Performing 3,249,997 Total retail 155,640,704 Wholesale - Low Risk 61,046,614 - Medium Risk 25,734,387 - High Risk 10,857,921 - Non Performing 4,564,552 Total wholesale 102,203,474 Debt Securities - Debt Securities ( <> other than corp bonds) B+ 29,076,683 - Debt Securities (National government bonds) CCC 16,067,315 - Debt Securities ( = corporate bonds) B+ 68,716 Total debt securities 45,212,714 Total credit risk exposure 303,056,892 For comparative purposes, we have disclosed the information of credit quality of assets for the current year according to the 2018 disclosure criteria as shown below. The Group’s credit quality analysis of loans and advances with stage allocation by asset classification as of December 31, 2019 and 2018 is provided below. Carrying amounts are broken down by financial instruments and counterparties. Gross Net of allowances December 31, December 31, Stage 1 Stage 2 Stage 3 Financial assets at amortized cost 208,136,419 196,590,375 176,257,793 18,114,616 2,217,966 Loans and advances to customers 201,454,375 190,041,967 169,934,636 17,889,383 2,217,948 Loans and advances to financial institutions 5,198,021 5,069,933 5,069,933 — — Other financial assets 1,466,191 1,460,643 1,235,392 225,233 18 Loans and advances to central banks 17,405 17,405 17,405 — — Loans and advances to government sector 427 427 427 — — Financial assets at fair value through other comprehensive income 45,212,713 40,309,297 29,088,445 11,220,852 — Debt securities 45,212,713 40,309,297 29,088,445 11,220,852 — Total financial assets 253,349,132 236,899,672 205,346,238 29,335,468 2,217,966 Total loan commitments and financial guarantees 49,707,760 48,777,183 44,252,081 4,516,549 8,553 Total credit risk exposure 303,056,892 285,676,855 Gross Net of allowances December 31, December 31, Stage 1 Stage 2 Stage 3 Financial assets at amortized cost 325,210,804 318,689,020 297,513,220 18,400,430 2,775,370 Loans and advances to customers 270,764,079 264,512,229 243,336,429 18,400,430 2,775,370 Other financial assets 19,786,692 19,786,689 19,786,689 — — Reverse repurchase agreements 19,784,563 19,566,144 19,566,144 — — Loans and advances to financial institutions 14,874,564 14,823,052 14,823,052 — — Loans and advances to government sector 317 317 317 — — Loans and advances to central banks 589 589 589 — — Financial assets at fair value through other comprehensive income 37,787,332 37,787,332 37,787,332 — — Debt securities 37,765,909 37,765,909 37,765,909 — — Equity instruments 21,423 21,423 21,423 — — Total financial assets risk 362,998,136 356,476,352 335,300,552 18,400,430 2,775,370 Total loan commitments and financial guarantees 220,441,622 219,472,627 208,963,783 10,397,237 111,607 Total credit risk exposure 583,439,758 575,948,979 Mitigation of credit risk, collateralized credit risk and other credit enhancements In most cases, maximum credit risk exposure is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existence of guarantees could be a necessary but not sufficient instrument for accepting risks, as the assumption of risks by the Group requires prior evaluation of the debtor’s capacity for repayment, or that the debtor can generate sufficient resources to allow the amortization of the risk incurred under the agreed terms. The procedures for the management and valuation of collateral following the Corporate Policies (retail and wholesale), which establish the basic principles for credit risk management, including the management of collaterals assigned in transactions with customers. The methods used to value the collateral are in line with the best market practices and imply the use of appraisal of real-estate collateral, the market price in market securities, the trading price of shares in investment funds, etc. All the collaterals received must be correctly assigned and entered in the corresponding register. Regarding the types of collateral managed by BBVA Argentina, the following stand out: • Guarantees: It includes sureties or unsecured instruments. • Joint and several guarantee: upon default on payment, the creditor may collect the unpaid amount from either the debtor or the surety. • Joint guarantee: in this case the guarantors and debt-holders are liable in proportion to their interest in the company / transaction and restricted to such amount or percentage. • Security Interest: it includes guarantees based on tangible assets, which are classified as follows: • Mortgages: a mortgage does not change the debtor’s unlimited liability, who is fully liable. They are documented pursuant to the Group’s internal regulations for such purposes and are duly registered. Also, there is an independent appraisal, at market value, which enables a prompt sale. • Pledges: this includes chattel mortgages of motor vehicles or machinery, as well as liens on time deposits and investment funds. To be accepted, they shall be effective upon realization accordingly, they are properly documented and shall be approved by the Legal Services area. Finally, the Group hedges against the variation in the value of the pledge. Loan commitments To meet the specific financial needs of customers, the Group’s credit policy also includes, among others, the granting of financial guarantess, letters of credit and lines of credit through checking accounts overdrafts and credit cards. Although these transactions are not recognized in the Consolidated Statement of Financial Position, because they imply a potential liability for the Group, they expose the Group to credit risks in addition to those recognized in the Consolidated Statement of Financial Position and are, therefore, an integral part of the Group’s total risk. Main types of guarantors and counterparties of credit derivatives The Group defines that the collateral (or credit derivative) shall be direct, explicit, irrevocable and unconditional in order to be accepted as risk mitigation. Furthermore, regarding admissible guarantors, BBVA Argentina accepts financial institutions (local or foreign), public entities, stock exchange companies, resident and non-resident Credit quality of financial assets that are neither past due nor impaired The Group has tools (“scoring” and “rating”) that enable it to rank the credit quality of its transactions and customers based on an assessment and its correspondence with the probability of default (“PD”) scales. To analyze the performance of PD, the Group has a series of tracking tools and historical databases that collect the pertinent internally generated information. These tools can be grouped together into scoring and rating models, being the main difference between ratings and scorings is that the latter are used to assess retail products, while ratings use a wholesale banking customer approach. These different levels and their probability of default were calculated by using as a reference the rating scales and default rates. These calculations establish the levels of probability of default for the Bank’s Master Rating Scale. Although this scale is common to the entire Group, the calibrations (mapping scores to PD sections/Master Rating Scale levels) are carried out at tool level for each country in which the Group has tools available. Market risk BBVA Argentina considers market risk as the likelihood of losses of value of the trading portfolio as a consequence of adverse changes in market variables affecting the valuation of financial products and instruments. The main market risk factors the Group is exposed to are as follows: • Interest rate risk: From exposure to changes in the various interest rate curves. • Foreign exchange risk: From changes in the various foreign exchange rates. All positions in a currency other than the currency of the consolidated statements of financial position create foreign exchange risk. The Financial Risks Management of the Risks Management area applies the criteria, policies and procedures defined by the Board of Directors within the management of that risk, with a follow-up The financial risks management model of BBVA Argentina consists of the Market Risks and Structural Risks and Economic Capital Areas, which are coordinated for control and follow-up The management of these risks is in line with the basic principles of the Basel Committee on Banking Supervision, with a comprehensive process to identify, measure, monitor and control risks. The organization of financial risks is completed with a scheme of committees in which it participates, for the purpose of having an agile management process integrated into the treatment of the various risks. Among others: • Assets and liabilities committee (ALCO) . • Risk Management Committee (RMC) . • Financial Risks Committee (FRC) . BBVA Argentina has many tools and systems to manage and follow-up The main market risk metric is VaR (“Value at Risk”), a parameter to estimate the maximum loss expected for the trading portfolio positions with a 99% confidence level and a time horizon of 1 day. Current management structure and procedures in force include follow-up The market risk measurement model is periodically validated through Back-Testing to determine the quality and precision of the VaR estimate. The Market Risk management model contemplates procedures for communication in the event the risks levels defined are exceeded, establishing specific communication and acting circuits based on the exceeded threshold. The market risk measurement perimeter is the trading portfolio (trading book) managed by the Global Markets unit. This portfolio mainly consists of: • Argentine Government Securities. • BCRA Li quidity • Provincial debt securities. • Corporate Bonds. • Foreign exchange spot. • Derivatives (Exchange rate Futures and Forwards and Interest rate swaps). The following tables show the evolution of trading portfolio total VaR and VaR per risk factors based on daily VaR information : VaR (in millions of pesos) Year-ended Year-ended Average 81.60 22.86 Minimum 11.55 4.97 Maximum 273.42 97.37 Closing 43.57 49.36 VaR per risk factors – (in millions of pesos) VaR interest rate Year-ended Year-ended Average 71.97 19.00 Minimum 8.26 3.13 Maximum 234.32 93.76 Closing 43.99 49.90 VaR foreign exchange rate Year-ended December 31, Year-ended Average 25.85 9.64 Minimum 0.85 0.28 Maximum 155.02 37.98 Closing 3.92 2.65 Currency risk The position in foreign currency is shown below: Total as of As of December 31, 2019 (per currency) Total as of US Dollar Euro Real Other ASSETS Cash and cash equivalents 87,682,802 84,697,740 2,717,935 4,811 262,316 80,746,913 Financial assets at fair value through profit or loss 166 166 — — — 10,719 Reverse repurchase agreements — — — — — 19,546,503 Other financial assets 2,542,798 2,534,965 7,833 — — 2,582,964 Loans and advances 34,300,359 34,033,214 267,145 — — 93,277,671 Financial assets at fair value through other comprehensive income 7,413,880 7,413,880 — — — 5,141,185 Other assets — — — — — 339,377 Equity instruments 27,138 27,138 — — — 21,077 TOTAL ASSETS 131,967,143 128,707,103 2,992,913 4,811 262,316 201,666,409 LIABILITIES Deposits 117,231,027 115,106,328 2,124,699 — — 176,130,348 Trading liabilities 449,618 449,618 — — — 53,529 Other financial liabilities 7,687,505 7,347,985 302,162 — 37,358 8,189,043 Bank loans 3,050,563 2,787,387 263,176 — — 8,307,999 Other liabilities 1,242,338 1,168,254 74,084 — — 1,456,070 TOTAL LIABILITIES 129,661,051 126,859,572 2,764,121 — 37,358 194,136,989 The notional amounts of the foreign currency term and forward transactions are reported below: December 31, December 31, Foreign Currency Forwards Foreign currency forward sales—US$ 620,956 760,615 Foreign currency forward purchases—US$ 618,497 620,651 Foreign currency forward sales—Euros 1,804 5,463 Foreign currency forward purchases—Euros 35 — Interest rate risk Structural interest risk (SIR) gathers the potential impact of market interest rate variations on the margin of interest and the equity value of BBVA Argentina. The process to manage this risk has a limits and alerts structure to keep the exposure to this risk within levels that are consistent with the appetite for risk and the business strategy defined and approved by the Board of Directors. Within the core metrics used for measurement, follow-up • Margin at Risk (MaR): quantifies the maximum loss which may be recorded in the financial margin projected for 12 months under the worst case scenario of rate curves for a certain level of confidence. • Economic Capital (EC): quantifies the maximum loss which may be recorded in the economic value of the Group under the worst case scenario of rate curves for a certain level of confidence. The Group additionally carries out an analysis of sensitivity of the economic value and the financial margin for parallel variations by +/- 100 basis points over interest rates. The following table shows the sensitivity of the economic value (SEV), to +100 basis points variation presented as a proportion of Core Capital: SEV +100 bps December 31, December 31, Closing 0.32 % 1.43 % Minimum 0.04 % 1.01 % Maximum 1.64 % 2.05 % Average 0.77 % 1.61 % The following table shows the sensitivity of the financial margin (SFM), to -100 12-month SFM -100 December 31, December 31, Closing 0.82 % 2.14 % Minimum 0.58 % 1.98 % Maximum 2.20 % 2.73 % Average 1.48 % 2.26 % Liquidity and financing risk The liquidity risk is defined as the possibility of the Group not efficiently meeting its payment obligations without incurring significant losses which may affect its daily operations or its financial standing. The short-term purpose of the liquidity and financing risk management process at BBVA Argentina is to timely and duly address payment commitments agreed, without resorting to additional funding deteriorating the Group’s reputation or significantly affecting its financial position, keeping the exposure to this risk within levels that are consistent with the appetite for risk and the business strategy defined and approved by the Board of Directors. In the medium and long term, to watch for the suitability of the financial structure of the Bank and its evolution, according to the economic situation, the markets and regulatory changes. Within the core metrics used for measurement, follow-up LtSCD: (Loan to Stable Customers Deposits), measures the relationship between the net credit investment and the customers’ stable resources, and is set forth as the key metric of appetite for risk. The goal is to preserve a stable financing structure in the medium and long term. LCR: (Liquidity Coverage Ratio), which measures the relation between high quality liquid assets and total net cash outflows during a 30-day Below is the LCR ratios: December 31, December 31, LCR 413 % 91 % The following charts show the concentration of deposits as of December 31, 2019 and 2018: December 31, 2019 December 31, 2018 Number of customers Debt balance % over Debt balance % over total 10 largest customers 10,875,308 3.70 % 23,525,681 5.89 % 50 following largest customers 17,030,642 5.79 % 23,926,818 5.99 % 100 following largest customers 13,414,450 4.56 % 16,221,565 4.06 % Rest of customers 252,667,647 85.95 % 335,534,953 84.06 % TOTAL 293,988,047 100.00 % 399,209,017 100.00 % The following chart show the breakdown by term of loans and advances, other financing and financial liabilities considering the total amounts to their due date, as of December 31, 2019 and 2018: Assets Liabilities (*) December 31, December 31, December 31, December 31, Up to 1 month 99,748,118 116,535,072 305,122,145 410,555,522 From more than 1 month to 3 month 26,654,927 40,166,007 24,232,243 35,150,020 From more than 3 month to 6 month 14,580,725 40,614,599 8,684,764 13,601,856 From more than 6 month to 12 month 19,415,772 25,896,503 5,740,511 5,120,730 From more than 12 month to 24 month 27,857,740 33,588,065 1,172,095 2,783,466 More than 24 months 41,914,222 64,047,294 3,696,017 58,130 TOTAL 230,171,504 320,847,540 348,647,775 467,269,724 (*) These figures includes expected interest amounts. For floating rate instruments such interest amounts were calculated using today’s rate. Additionally, the Bank has issued financial guarantees and loan commitments which may require outflows on demand. December 31, December 31, Financial guarantees and loan commitments 171,822,963 220,023,853 The amounts of the Bank’s financial assets and liabilities, which are expected to be collected or paid twelve months after the closing date are set forth below: December 31, December 31, Financial assets Loans and advances 69,771,962 70,684,866 Debt securities 175,629 11,203,612 Reverse repurchase agreements — 14,541,517 Total 69,947,591 96,429,995 Financial liabilities Other financial liabilities 4,144,530 1,313,978 Bank loans 492,673 259,934 Debt securities issued 136,306 781,130 Deposits 94,603 60,599 Total 4,868,112 2,415,641 |
