1. Risk management in banks Leoš Souček, Komerční banka

2. Introduction / Czech economic specifics… 1/2
Private sector indebtedness at the lower end of EU levels
Indebtedness of corporate sector at 22% of GDP
Indebtedness of households 30% of GDP
Dynamic growth of mass retail exposure (above 30% yoy in ) slow-downed in 2010/2011 (6.6% yoy in 07/2011)
Also public sector indebtedness lower than EU peers
CZ at 38.5% end of (FR: 82%, DE: 83%, HU: 80%, PL: 55%, SK: 41%, IT: 119%, GR: 143%)
Budget deficit narrowed to ‑4.7% GDP in 2010 (SK: ‑7.9%, HU: ‑4.3%, GR: ‑10.5%, FR: ‑7.0%, DE: ‑3.3%, AT: ‑4.8%)
Despite fragile political stability some progress in reforms, which help to secure fiscal sustainability
Health care and pension reforms under progress
S&P raised the LTFC Czech Republic rating to 'AA-'
No concrete plans on EUR adoption
Limited dependence on external financing
Relative low level of external debt in terms of GDP
External financing needs covered by FDI and EU funds

3. Introduction / Czech economic specifics… 2/2
Limited share of private foreign currency debt
13.0% for private sector (in 7/2011, both residents and non residents)
17.4% for corporate, 0.14% for households (residents only) export-oriented corporates as main users
150% coverage ratio by foreign currency deposits (res. only)
Healthy banking sector
Confirmed by CNB stress tests
Sustained banking sector profitability since early 2000s
Favorable loan-to-deposit ratio at 78% July 2011
Strongly capitalized (in end-June, 15.9% average regulatory capital ratio)
Growth largely relying on external factors …
Share of nominal exports on GDP at 80% in 2010
84% of exports concentrated on the EU-27 in (two predominant partners: Germany 32% and Slovakia 9%)
Absence of major macroeconomic imbalances - current account worsened to 3.8% of GDP in 2010
Substantial foreign ownership following high FDI inflows
... and on the cyclical industry sectors
Industry sectors represents 30% of GDP (vs. 22% in Germany and 12% in France)
Highly cyclical (predominant car industry and machinery)

4. Introduction / Banking sector
As of
12/2011
Three key banks (market share at about 70%) KB
(SG Group) ČS
(ERSTE Group)
ČSOB
(KBC Group)
Net profit
9,5
13,6
11,2
Deposits (Bn CZK)
586,0
783,3
721,6
Loans (Bn CZK)
441,4
483,5
440,5
Cost of Risk (Bn CZK)
-7,3
-5,5
-5,0
o/w loans
-2,0
-1,8
o/w other risks (Gr)
-5,3
0,0
-3,2
Cost of Risk (bps)
181bps (39bps)
114bps
36bps
Loan to Deposits
77,5%
71,9%
69,5%
LUSR
5,7%
6,0%
5,2%
CIR
41.2%
41,8%
44,8%
CAR
14,6%
13,1%
15,6%
ROE
12,3%
18,2%
17,3%
Zoom on KB:
SG Group member since 2002.
Third largest bank in ČR:
about employees.
about 400 point of sales.
KB initially corporate bank.
Retail developed after 2000.
KB’s market share on credit lending:
Mortgages: 23%
Small Business: 20%
Corporates: 30%
Municipalities: 40%

5. Risk Management / Functions & Missions
Credit Risk Management
Retail: model based and statistical approach (PD, LGD, EL)
Individual approach for non-retail (Corporate, Banks, Sovereign)
Collateral Evaluation (independent on client or distribution channel, on-site visits)
Market Risk Management
FX, IR, commodity, credit risk, …
Monitoring and reporting
Quality of portfolio / Focus on sensitive sections / Distribution channels / Sensitivity to market (FX, IR, ..)
Back-testing of models
Recovery / Collection
Pre-early collection (-5DPD - 5DPD), Soft collection (5DPD – 90DPD)
Hard recovery (90DPD +)
Operational Risk Management
Antifraud policy, Insurance, Business continuity plans, estimations of operational losses, …

6. Risk Management / Zoom on KB organization
Universal Risk Management Function / OpRisk out of scope.
Matrix organization / One of largest Risk Management in the SG Group (330FTE).
SG RISQ
KB RISQ
A. Viry (L. Souček)
Credit Risk Assessment
Corporate deal-flow
Capital Markets
Risks
Market risk
Capital markets
Assets Valuation & Recovery
Hard recovery
Collateral Evaluation
Risk Information Systems
Risk databasis
Supervision and Measurement
Scoring models
Monitoring
Risk Methodology
Credit frauds
Functional links with SG RISQ departments

7. Risk Management / History of model development in KB
In-house score-card development since 1998 (IND, SB, Corp, Muni).
SG models used for sovereign and banks since 2002.
KB historical view:
1990 – 1997: Score-card developed by analysts (very simple expert models).
1997 – 1998: Score-card developed by statisticians (consumer loans, mortgages, corp).
2002 – 2003: Models implemented to the central rating system.
2001 – 2002: Behavioural scoring model developed (IND, SB).
2002 – 2005: Review of models with SG after acquisition.
2002 – 2007: Progressive usage of credit bureaus for retail (CBCB, SOLUS).
2005 – 2007: Implementation of Ba2 standards in KB (advanced methods for all credit portfolios).
2008 – 2011: Development and implementation of credit fraud prevention.

8. MONITORING / REPORTING
Risk Management / Key risks for the bank
MONITORING / REPORTING
CREDIT RISK
OPERATIONAL RISK
MARKET RISK
RECOVERY
3 DANGERS
NOT INTEGRATED CYCLE
LOW UNDERSTANDING
MODEL RISK

9. Default, PD= 100% “90DPD or unlikely to pay”
Credit Risk / Key elements PD, LGD, EaD
Expected Loss (EL) = EaD * 1Y PD * LGD
Risk Weighted Assets (RWA) = RW * EaD
RW = Function (PD, LGD, Maturity, Regulatory correlation, Regulatory interval of conf. 99.9%)
1Y PD = Probability of Default during following 1Y
LGD = Loss Given Default
EaD = Exposure at Default
RW = Risk Weight
RWA = Risk Weighted Assets
Actual Exposure = On B/S + Off B/S
Exposure at Default (EaD) = On B/S + Off B/S * CCF
Off B/S
CCF
LGD
Recovered cash
On B/S
Non-Default, PD < 100%
Default, PD= 100% “90DPD or unlikely to pay”
Recovery process

10. Market Risk RWA + Credit Risk RWA + Operational Risk RWA
Credit Risk / Ability to absorb a loss
Bank Capital
Market Risk RWA + Credit Risk RWA + Operational Risk RWA
CAR =
> 8%
CAR = Capital Adequacy Ratio
Regulatory minimum at 8%
Unexpected Loss as a variation of Expected Loss
FREQUENCY OF LOSSES
Stress
Testing
Probability 99,9%
Probability 0,1%
Expected Loss
covered by revenues
Unexpected Loss
covered by the capital
Extreme Loss
!!! DEFAULT !!!
SIZE OF LOSSES

11. Credit Risk / Credit portfolios per PD & LGD
Expected Loss (given by PD and LGD) is reflected in pricing.
Expected Loss
Client rate: 3,5%
Net margin
1,0%
Expected Loss
0,5%
Cost of funds
2,0%

12. Credit Risk / Corporates / Rating Model
Individual assessment is prevailing.
Financial assessment (financial data)
Economic assessment (position in market, …)
Model rating revised by credit analyst.
Rating scales for non-retail
Moody’s
S&P
1Y PD
Country
Aaa
AAA
0,01%
DE, USA, FR (M)
Aa1
AA+
FR (S&P)
Aa2 AA
0,02%
BE, SI
Aa3
AA-
0,03%
IT, JP A1 A+
CZ, SK, CN A2 A
0,04% PL A3 A-
0,06%
Baa1
BBB+
0,13%
Baa2
BBB
0,26%
RU, BR
Baa3
BBB-
0,50%
Ba1
BB+
1,10%
HU, RO
Ba2 BB
2,12%
Ba3
BB-
3,26%
BUL B1 B+
4,61% B2 B
7,76% UA B3 B-
11,42%
Caa1
CCC+
14,33%
Caa2
CCC
20,44%
Caa3
CCC-
27,25%
Default
100,00% GR
Financial Rating
Behavioural Rating
Economic Rating
Model Rating
Credit analyst
Final Obligor Rating

13. Credit Risk / Retail / Granting process
Maximally automated (95% of approvals) / Maximally parameterized / Maximally centralized.
Data collection / Independent verification / Assessment by statistical model.
DATA COLLECTION (COMPLEX INFORMATION ABOUT CLIENT)
APPLICATION FORM
(DEMOGRAPHIC DATA)
INTERNAL BANK DATA
(BEHAV. DATA)
CREDIT REGISTERS
(CREDIT HISTORY)
TRANSACTION
PARAMETERS
COLLATERAL
CREDIT ANTIFRAUD SYSTÉM (IDENTITY, EMPLOYER, DATA)
SCORING MODEL
(YES / NO)
INSTALLMENT LIMIT
(YES / NO)
COLLATERAL EVALUATION
(YES / NO)

14. (data in subsidiaries) (data from the register)
Credit Risk / Retail / Scoring Model
MAIN DRIVER OF PREDICTING POWER
Basic Behavioural SM (Bank)
Behavioural Model
(data in the bank)
IN KB SINCE 2002
Complex Behavioural SM (Group)
Advanced Behavioural SM
Advanced Application SM
Behavioural Models
(data in subsidiaries)
IN KB SINCE 2007
Application rating
Credit Register Model
(data from the register)
IN KB SINCE 2006
3 KEY ADVANTAGES
High predicting power.
Complex assessment.
High flexibility (4 boxes).
Demographic Model
(application form)
IN KB SINCE 1998

15. Credit Risk / Retail / Scoring Model
3 KEY ADVANTAGES
Fast and easy process
High volume of production
Top quality of production
3 KEY RISKS
No view of expenditures
Limited assessment
Change of behaviour
1 200 ths. clients EUR 6 400M
300 ths. clients EUR M
170 ths. clients EUR 400M
80 ths. clients EUR 32M
2002
2004
2006
2011
PRODUCTS AO
AO, CL, CC
AO, CL, CC
AO, CL, CC
MAX LIMIT
EUR 400
EUR 2 400
EUR 6 000
EUR
CLIENTS KB KB KB
KB GROUP

16. CONTACT
RNDr. Ing. Leoš Souček
Deputy Head of Risk Management
Komerční banka, a.s.
Tel: