1. Supervisory Assessment of Subsidiaries‘ Loan Portfolios And Cooperation With Host Supervisors Vienna, 21. October 2014 Boris Simunovic CFA, FRM OeNB On-Site Banking Inspections Division – Significant Institutions Boris.simunovic@oenb.at

2. www.oenb.atoenb.info@oenb.at - 2 - Austrian Banks: Subsidiaries In More Than 15 Countries

3. www.oenb.atoenb.info@oenb.at - 3 - Content Austrian Banks and Their Subsidiaries The Importance of On-Site Loan Book Assessment OeNBs Approach to Supervisory On-Site Cooperation Overview: Loan File Assessment in an IFRS Context Loan Quality Assessment and Supervisory Cooperation Q&A

4. www.oenb.atoenb.info@oenb.at - 4 - On-Site Look at Subsidiaries‘ Loan Books Is Essential Loans are originated, booked and serviced locally single-loan-information locally available in greater detail heterogeneity: knowledge of local market conditions essential when assessing credit quality Local subsidiaries subject to local as well as IFRS accounting meeting local requirements naturally has a high priority for banks understanding differences local vs. group (IFRS) regulation is important Understand objectives, motives and concerns of local regulator how do local specifics affect group steering (e.g. dividends, products, capital…) local regulatory information often helpful in identifying IFRS issues (e.g. forbearance)

5. www.oenb.atoenb.info@oenb.at - 5 - All OeNB On-Site Activity Within Legal Framework OENB emphasizes strong cooperation with local supervisors purpose and target of examination shared in opening meeting with host supervisor important to understand respective bank‘s standing in the local market (strategy, issues…) Host supervisors invited to participate in examination local supervisors offered to actively participate in all meetings with local bank local supervisors are first reference regarding local specifics (language, legal framework…) Transparency with respect to results and findings results about respective bank fully shared in exit meeting with host supervisor host supervisor recieves short summary report

6. www.oenb.atoenb.info@oenb.at - 6 - Loan Book Assessment: What to Look For Loan Classification Default setting performing/nonperforming Basel II compliance restructuring/forbearance Rating Quality segmentation/rating model frequency of overrulings sensitivity of rating Valuation / Provisioning IFRS Compliance methodology and documentation NPV effects of restructurings DCF - assumptions Collateral legal enforcement consistency loan file/system appraisals and haircuts

7. www.oenb.atoenb.info@oenb.at - 7 - Loan Quality Assessment And Supervisory Cooperation Host supervisors helpful in selecting appropriate loan sample better understanding of local issues (risk-sectors, bank specifics…) concerns of local regulator can be taken into account (large exposures…) Knowledge of local rules helpful assessing Basel II compliance default classification can differ between regulatory systems: (eg. collateralized loans…) positive local rules sometives can be helpful identifying aggressive forbearance measures Information on local market conditions essential for judgement on provisioning levels enforceability of legal claims, marketability of certain assets… knowledge about other local banks‘ practice helpful assessing adequacy of, e.g. haircuts…

8. www.oenb.atoenb.info@oenb.at - 8 - THANK YOU FOR YOUR ATTENTION