Enterprise Risk Management at ABN AMRO

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Credit Risk contd..

• Defining the appropriate credit authority for approvals on a risk-based matrix and setting the frequency of reviews
• Identifying general trends in the quality of the bank's credit portfolios and consequent adjustment to credit strategies
• Generating key data for Risk Adjusted Return on Capital (RAROC), economic capital and expected loss calculations.

ABN AMRO had developed rating tools to determine UCRs. Rating tools were available for corporate clients worldwide, SMEs in the Netherlands and Brazil, project finance, banks and insurance companies.

ABN AMRO applied an internally developed multi-factor RAROC model and a Loan Pricing Tool to evaluate transactions. Criteria used for evaluating transactions included return on economic capital, the expected loss, UCR, tenor, collateral, exposure, pricing and country.

C&CC was the largest SBU, holding 68% (up from 66% in 2001) of total loans outstanding, with WCS second, at 22% (26% in 2001). PC&AM and other businesses within the group accounted for the remainder. The Netherlands continued to have the largest asset base, accounting for 54% of total loans outstanding, followed by North America with 27% and Brazil with 2%.

Consumer & Commercial Clients

The Netherlands represented 62% of total C&CC loans outstanding (57% in 2001), followed by North America at 32% (36%), and Brazil at 2% (3%). The relative increase in the importance of the Netherlands mainly reflected the appreciation of the euro against the US dollar and the Brazilian real.

Exhibit: VIII
ABN AMRO: C&CC – Total Private Loans for 2002

Source: ABN AMRO Annual Report, 2002

The consumer business (for example mortgages, car financing and personal loans) accounted for 59% of total C&CC private loans, while commercial loans to middle-market companies accounted for the remaining 41%.

In the Netherlands, mortgage lending was the most important part of the consumer portfolio. The mortgage portfolio was over EUR 52 billion. Bouwfonds, ABN AMRO's subsidiary, had a mortgage and real estate financing portfolio of EUR 22 billion.

In the US, ABN AMRO functioned as a large retail and commercial bank through its subsidiaries, LaSalle Bank and Standard Federal Bank. LaSalle primarily concentrated on commercial business in the Midwest and represented 55% of the total US C&CC loan portfolio. Standard Federal (45% of the total outstanding) also had a commercial business and was one of the largest mortgage service providers in the US.

Brazil was mainly a consumer franchise. Consumer products for individuals represented 63% of C&CC's loan portfolio. The main products were auto loans and loans to individuals.

Wholesale Clients

These clients were mostly located in developed countries. The most important geographical concentrations were Europe at 54% (49% in 2001), and North America at 28% (30%) of total limits as of year-end 2002. Market conditions and exchange rate movements caused a noticeable shift of WCS total limits from North America to Europe during 2002.

In terms of client Business Units (Bus), Financial Institutions & Public Sector (FIPS) was the largest at 63% of the portfolio, based on GOOE, followed by Country Coverage at 13%, Integrated Energy at 10%, Telecom, Media, Technology &Healthcare (TMTH) at 9%, and Consumer at 5%. In terms of individual industries, the largest was utilities at 3.8%, followed by telecom at 3.3%, manufacturing at 3.2%, and oil and gas at 3.2%. All industry exposures were controlled under agreed caps and diversified across geographic markets.

Exhibit: IX
ABN AMRO:Net Additions to Specific Provisions per SBU & Non-performing Loans

In 2002, ABN Amro significantly reduced corporate limits and tightened exposure caps on non-investment grade counterparties. It imposed limits on certain industries with an unfavourable economic outlook. The bank undertook stress tests on individual portfolios, hedged through credit default swaps; and conducted secondary market sales to reduce exposure. Credit quality, as measured by weighted-average UCR, remained at investment grade levels (BBB range) at the end of the year.

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