Munich has more than its fair share of heavyweight financial firms, and Bayerische Landesbank is the largest of the regional state banks in Germany. Gerhard Gribkowsky, chief risk officer at the bank since the beginning of 2003, has the unenviable task of turning around Bayerische Landesbank’s poor record in credit risk management.
Bayerische Landesbank has suffered severe credit losses in recent years. There was its more than e2 billion engagement in German media group Kirch, insolvent since April 2002, and last year its net risk provision spiralled to e2.3 billion, almost twice the 2001 level of e1.2 billion. For 2003, it will again have to set aside more than e1 billion to cover risks.
So far, the bank’s AAA credit rating, supported by state guarantees, is unaffected. But in 2005, it will lose this support in line with a European Union ruling on Landesbanken guarantees. Like its peers, Bayerische Landesbank is adapting its strategy for post-2005. It will focus on wholesale business in Bavaria, Germany and neighbouring countries, and expand its central bank function for the region’s 82 savings banks.
Bayerische Landesbank’s main concern, however, is to improve its risk profile and reduce risk-weighted assets. “This is our top priority,” says 45-year-old Gribkowsky, who is the bank’s first chief risk officer. “We have burdens from the past that we must eliminate.” The bank has started shedding such assets – via divestitures and securitisations and netting, for example. In the first half of 2003, risk-weighted assets were down by 11.3%.
By 2006, Bayerische Landesbank, with a e350 billion loan portfolio, wants to cut annual net risk provisions to e400 million. “Given the composition of our portfolio, this is a normal level,” says Gribkowsky, who before joining the bank at the start of the year spent his entire professional career with Deutsche Bank in Germany, and the past 10 years in its risk management division. He says Bayerische Landesbank will meet its target.
At the start of this year, the Landesbank decided on a complete overhaul of its risk management set-up: from policy and decision making, to staffing and organisation, to its technology. At the core is the establishment for the first time of a central risk control and policy-setting function. This year, the conceptual foundations were adopted; much of the implementation is scheduled for 2004. Bayerische Landesbank has already assigned most of the 800 risk management staff across the group that will be involved. In January, for example, its first uniform group-wide credit policy will take effect.
Gribkowsky says his most important task is reducing and limiting single-name exposure. “Bayerische Landesbank, like many other Landesbanken, focused strongly on credit business, and typically committed relatively large credit volumes to individual clients,” he says. It has some sector concentration in utilities and aviation, but he says such exposure is small. The ongoing creation of industry-specific risk teams, replacing a client group-based approach, will help keep a better check on such risk, he says.
The new credit policy sets strict limits on bulk single-name exposures – based on the loan’s maturity and the bank’s internal credit rating for the client. Bayerische Landesbank is talking to clients to adjust commitments accordingly, if necessary. Some exceed caps by 25% or more, others are closer to or within limits. “In more than 90% of cases, we are reducing our exposure to the set bulk risk limit,” says Gribkowsky. “If the individual commitment doesn’t meet our return on equity or capital target despite conversations with the client, we will cut it down much further.”
The portfolio restructuring is part of Bayerische Landesbank’s shift from a volume-driven approach to its credit business to one focused on risk-adjusted return on equity or capital – “a fundamental paradigm change”, says Gribkowsky. It is implementing a new internal rating system, developed jointly by the Landesbanken with some input from Germany’s savings banks (Risk November 2002, page 24), which has almost twice as many rating categories as its old tool and is based more strongly on objective criteria such as financial ratios, rather than primarily expert opinion. “This improves portfolio transparency and risk assessment of individual exposures,” says Gribkowsky. “Decision parameters become clearer, and it becomes more evident which steps are necessary to limit risk.” The bank has already rated as much as 70% of its portfolio with the new tool.
But Gribkowsky, who in the 1990s launched Deutsche Bank’s framework for dealing with bad loans and revamped its credit process, says it will be several years before Bayerische Landesbank’s risk reduction and control efforts yield results in terms of lower risk provisions. The restructuring of bulk exposures, for example, will last far into 2004, and the bank’s annual risk provision will remain above the e400 million target until 2006, he says.
The key to ensuring Bayerische Landesbank meets its targets will lie with creating acceptance among staff for its new risk management culture, says Gribkowsky. “We need to engage our colleagues to ensure these policies and procedures are incorporated into existing and new client relationships,” he says. 2004 is going to be all about education.