| 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 • 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, 2020 and 2019 is provided below: Credit risk exposure December 31, Stage 1 Stage 2 Stage 3 Cash and cash equivalents 86,184,474 86,184,474 — — - BCRA unrestricted current account 86,184,474 86,184,474 — — Financial assets at amortized cost 344,596,958 299,911,768 39,248,718 5,436,472 Wholesale 127,382,078 112,935,399 11,532,469 2,914,210 - Business 63,350,121 57,314,517 4,658,319 1,377,285 - Corporate & Investment Banking (CIB) 51,430,316 43,387,621 6,615,922 1,426,773 - Institutional and international 3,539 3,186 9 344 - MSMEs 9,853,004 9,515,836 227,360 109,808 - Others 2,745,098 2,714,239 30,859 — Retail 168,026,972 137,788,461 27,716,249 2,522,262 - Advances 397,966 224,119 58,893 114,954 - Credit cards 108,390,974 87,348,378 20,065,917 976,679 - Personal loans 27,678,973 21,409,918 5,126,960 1,142,095 - Pledge loans 12,762,900 12,446,707 78,369 237,824 - Mortgages 18,561,052 16,125,462 2,385,293 50,297 - Receivables from financial leases 234,513 233,326 805 382 - Others 594 551 12 31 Reverse repurchase agreements 49,187,908 49,187,908 — — - BCRA repos 49,187,908 49,187,908 — — Financial assets at fair value through other comprehensive income 127,543,852 90,151,041 37,392,811 — - Debt securities 127,543,852 90,151,041 37,392,811 — Total financial assets risk 558,325,284 476,247,283 76,641,529 5,436,472 Loan commitments and financial guarantees 62,527,175 57,622,393 4,895,830 8,952 Wholesale 15,103,722 14,192,903 903,181 7,638 - Business 4,696,427 4,509,965 180,282 6,180 - CIB 5,681,763 5,464,505 216,776 482 - Institutional and international 4,215,983 3,730,436 485,547 — - MSMEs 509,549 487,997 20,576 976 Retail 47,423,453 43,429,490 3,992,649 1,314 - Advances 4,971,492 4,874,422 97,011 59 - Credit cards 42,130,673 38,287,465 3,841,953 1,255 - Mortgages 289,695 258,729 30,966 — - Others 31,593 8,874 22,719 — Total loan commitments and financial guarantees 62,527,175 57,622,393 4,895,830 8,952 Total credit risk exposure 620,852,459 533,869,676 81,537,359 5,445,424 Credit risk exposure December 31, Stage 1 Stage 2 Stage 3 Financial assets at amortized cost 283,357,959 245,405,093 27,358,665 10,594,201 Wholesale 121,743,503 106,101,285 9,436,834 6,205,384 - Business 63,570,532 51,955,351 6,324,901 5,290,280 - CIB 54,764,063 52,123,004 1,825,624 815,435 - Institutional and international 781,390 427,890 353,022 478 - MSMEs 2,627,518 1,595,040 933,287 99,191 Retail 161,614,456 139,303,808 17,921,831 4,388,817 - Advances 634,087 394,705 149,426 89,956 - Credit cards 93,547,285 81,534,909 9,805,989 2,206,387 - Personal loans 33,189,072 24,553,711 6,783,052 1,852,309 - Pledge loans 13,086,909 12,625,716 261,480 199,713 - Mortgages 20,931,137 19,974,970 918,980 37,187 - Receivables from financial leases 224,639 218,816 2,809 3,014 - Others 1,327 981 95 251 Financial assets at fair value through other comprehensive income 61,506,254 39,634,085 21,872,169 — - Debt securities 61,506,254 39,634,085 21,872,169 — Total financial assets risk 344,864,213 285,039,178 49,230,834 10,594,201 Loan commitments and financial guarantees 67,672,394 61,008,074 6,619,755 44,565 Wholesale 16,874,379 13,133,774 3,734,472 6,133 - Business 12,256,853 10,592,414 1,660,653 3,786 - CIB 2,346,931 1,030,897 1,315,730 304 - Institutional and international 1,660,476 1,068,597 591,879 — - MSMEs 610,119 441,866 166,210 2,043 Retail 50,798,015 47,874,300 2,885,283 38,432 - Advances 5,400,667 5,219,511 179,008 2,148 - Credit cards 45,016,896 42,311,309 2,669,303 36,284 - Mortgages 336,459 313,579 22,880 — - Others 43,993 29,901 14,092 — Total loan commitments and financial guarantees 67,672,394 61,008,074 6,619,755 44,565 Total credit risk exposure 412,536,607 346,047,252 55,850,589 10,638,766 Information on the credit quality of assets The Group’s credit quality analysis of financial assets under IFRS 9 with risk allocation as of December 31, 2020 and 2019 is provided below: Credit quality analysis December 31, 2020 Cash and cash equivalents - BCRA unrestricted current account (Low risk) 86,184,474 Total cash and cash equivalents 86,184,474 Wholesale - Low risk 97,760,236 - Medium risk 26,525,516 - High risk 15,278,200 - Non performing 2,921,848 Total wholesale 142,485,800 Retail - Low risk 140,435,130 - Medium risk 68,578,972 - High risk 3,912,747 - Non performing 2,523,576 Total retail 215,450,425 Reverse repurchase agreement - BCRA repos CCC+ 49,187,908 Total reverse repurchase agreement 49,187,908 Debt securities - BCRA Liquidity Bills CCC+ 89,890,131 - Government securities CC 37,392,811 - Corporate bonds CCC+ 260,910 Total debt securities 127,543,852 Total credit risk exposure 620,852,459 Credit quality analysis December 31, Wholesale - Low risk 82,589,414 - Medium risk 35,034,923 - High risk 14,782,028 - Non performing 6,211,517 Total wholesale 138,617,882 Retail - Low risk 149,850,521 - Medium risk 54,347,711 - High risk 3,786,990 - Non performing 4,427,249 Total retail 212,412,471 Debt securities - BCRA Liquidity Bills B+ 39,585,142 - Government securities CCC 21,825,609 - Corporate bonds B+ 95,503 Total debt securities 61,506,254 Total credit risk exposure 412,536,607 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. The following are the principal types of collateral managed by BBVA Argentina • 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. 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 The Group defines that the collateral 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 the country level. 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 to manage, 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 Liquidity Bills • Provincial debt securities. • Corporate Bonds. • Foreign exchange spot. • Derivatives (Exchange rate Futures and Forwards and Interest rate swaps). The following tables show the trading portfolio total VaR and VaR per risk factors based on daily VaR information: VaR (in millions of pesos) Year-ended Year-ended Average 226.41 81.60 Minimum 27.42 11.55 Maximum 431.58 273.42 Closing 225.50 43.57 VaR per risk factors – (in millions of pesos) VaR interest rate Year-ended Year-ended Average 108.68 71.97 Minimum 6.97 8.26 Maximum 406.57 234.32 Closing 237.23 43.99 VaR foreign exchange rate Year-ended December 31, Year-ended Average 187.62 25.85 Minimum 2.93 0.85 Maximum 377.09 155.02 Closing 137.98 3.92 Currency risk The position in foreign currency is shown below: Total as of As of December 31, 2020 (per currency) Total as of US Dollar Euro Real Other ASSETS Cash and cash equivalents 114,954,079 110,150,270 4,568,050 33,778 201,982 119,371,805 Financial assets at fair value through profit or loss - Debt securities 629 629 0 0 0 226 Other financial assets 6,930,424 6,924,630 5,793 0 0 3,461,778 Loans and advances 27,928,287 27,928,212 0 0 75 46,696,681 Financial assets at fair value through other comprehensive income - Debt securities 0 0 0 0 0 10,093,293 Equity instruments 28,273 28,273 0 0 0 36,946 TOTAL ASSETS 149,841,692 145,032,014 4,573,843 33,778 202,057 179,660,729 LIABILITIES Deposits 137,441,745 134,734,046 2,707,699 0 0 159,598,906 Trading liabilities 0 0 0 0 0 612,112 Other financial liabilities 10,386,382 9,968,665 380,566 0 37,151 10,465,808 Bank loans 2,260,739 2,260,739 0 0 0 4,153,052 Other liabilities 1,142,679 1,104,580 21,282 0 16,817 1,691,325 TOTAL LIABILITIES 151,231,545 148,068,030 3,109,547 0 53,968 176,521,203 Net (1,389,583 ) (3,036,016 ) 1,464,296 33,778 148,089 3,139,526 The notional amounts of the foreign currency term and forward transactions are presented below: December 31, December 31, Foreign Currency Forwards Foreign currency forward purchases - US$ 1,011,403 618,497 Foreign currency forward sales - US$ 978,794 620,956 Foreign currency forward sales – Euros 6,834 1,804 Foreign currency forward purchases – Euros 0 35 Foreign currency forward - US$ 32,609 (2,459 ) Foreign currency forward - Euros 6,834 1,769 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 0.38 % 0.32 % Minimum 0.17 % 0.04 % Maximum 0.47 % 1.64 % Average 0.34 % 0.77 % The following table shows the sensitivity of the financial margin (SFM), to -100 12-month SFM -100 December 31, December 31, Closing 0.92 % 0.82 % Minimum 0.56 % 0.58 % Maximum 0.92 % 2.20 % Average 0.81 % 1.48 % 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), BBVA Argentina calculates the liquidity coverage coefficient daily by measuring the relation between high quality liquid assets and total net cash outflows during a 30-day Below is the LCR ratios: December, December, LCR Closing 321 % 413 % Max 354 % 525 % Min 292 % 410 % Avg 313 % 457 % The following charts show the concentration of deposits as of December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Number of customers Debt balance % over total Debt balance % over total 10 largest customers 47,049,746 9.84 % 14,805,699 3.70 % 50 following largest customers 40,204,538 8.41 % 23,185,601 5.79 % 100 following largest customers 25,447,726 5.32 % 18,262,499 4.56 % Rest of customers 365,521,254 76.43 % 343,982,998 85.95 % TOTAL 478,223,264 100.00 % 400,236,797 100.00 % The following chart show the breakdown by contractual maturity of loans and advances, other financing and financial liabilities considering the total amounts to their due date, as of December 31, 2020 and 2019: Assets (*) Liabilities (*) December 31, December 31, December 31, December 31, Up to 1 month (**) 141,716,796 135,797,587 473,165,815 415,394,814 From more than 1 month to 3 month 37,208,495 36,288,151 26,150,054 32,989,897 From more than 3 month to 6 month 30,735,275 19,850,272 31,502,743 11,823,481 From more than 6 month to 12 month 33,137,133 26,432,729 2,818,747 7,815,160 From more than 12 month to 24 month 33,794,545 37,925,667 2,142,351 1,595,696 More than 24 months 43,647,595 57,062,231 4,245,245 5,031,776 TOTAL 320,239,839 313,356,637 540,024,955 474,650,824 (*) These figures includes expected interest amounts. For floating rate instruments such interest amounts were calculated using interest rate prevailing at the end of each period. (**) The Bank has liquid assets such as cash and cash equivalents (Note 8), reverse repurchase agreements (Note 10.4) and BCRA liquidity bills (Note 14.1), among others, to settle its liabilities. Additionally, the Bank has issued financial guarantees and loan commitments which may require outflows on demand. Financial guarantees and loan commitments December 31, December 31, Up to 1 month 207,111,405 232,513,084 From more than 1 month to 3 month 700,808 2,756 From more than 3 month to 6 month 916,901 335,854 From more than 6 month to 12 month 2,816,669 164,735 From more than 12 month to 24 month 184,331 528,973 More than 24 months 635,499 375,240 TOTAL 212,365,613 233,920,642 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 77,442,142 94,987,898 Debt securities 28,562,761 239,102 Total 106,004,903 95,227,000 Financial liabilities Other financial liabilities 4,326,274 5,642,383 Bank loans 1,708,917 670,728 Debt securities issued 331,775 185,568 Deposits 20,630 128,793 Total 6,387,596 6,627,472 |
