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B Risk management

IFRS consolidated financial statements, notes to risk management

The principles, role and responsibilities of risk management

The objectives of Finnvera’s activities when financing the growth, internationalisation and exports of enterprises, as well as the strategies for reaching these objectives, form the foundation for risk management. Finnvera supplements the financial market and takes greater credit risks than financiers operating on commercial grounds. The credit risk is the principal risk segment for the Finnvera Group, other important segments being financial risks and operational risks associated with activities.

The task of risk management is to identify risks and to help Finnvera’s management to control risks that could jeopardise the attainment of the company’s objectives. Risk management is of central importance for maintaining the Finnvera Group’s ability to take risks and for attaining the company’s long-term economic objectives. Finnvera’s Board of Directors and executive management are responsible for arranging and organising internal control and risk management. The Board of Directors approves decision-making powers, the principles of risk management and the policies for risk-taking.

Working independently of Finnvera's business areas, the Risk Management Unit is responsible for the development of the methods and guidelines of risk management and for the monitoring of the Group's risk position. The Risk Management Unit is also responsible for coordinating the development and maintenance of the risk classification systems and for monitoring the functionality of the classification systems. The Risk Management Unit reports to the Chief Executive Officer. The practical measures regarding risk management are part of the day-to-day management and are taken care by the entire Finnvera organisation and the Group companies.

Controlled risk-taking

The State compensates Finnvera for some of the losses incurred in SME financing. Using revenues from its operations, Finnvera must cover its own share of any domestic credit and guarantee losses incurred from one economic cycle to the next. Apart from the buffer of accumulated equity, the State Guarantee Fund and the State of Finland secure the foreign country, bank and enterprise risks stemming from export credit guarantee operations. In the long term, profits from operations must cover the expenses and guarantee losses arising from operations. Finnvera’s goal is to take credit risks in a controlled manner in line with its operating principles, and to hedge against other risks or to minimise them. Some of the investments in subsidiaries consist of capital invested by the State through the parent company, while some is capital invested directly by the parent company.

Risk-taking in SME financing is steered by means of the credit policy and the risk-taking goals specific to each business area. These take into account, for instance, differences in the clientele and in the operating environment. The risk-taking goals are based on the targets set for Finnvera vis-à-vis its ownership policy, profitability and effectiveness. Risk-taking pertaining to export credit guarantees is steered by means of the country and guarantee policies ratified by the Board of Directors. Instruments such as reinsurance or credit derivatives may be used to hedge some credit risks in export credit guarantee operations.

In line with their strategic policies, the subsidiaries engaged in venture capital investment focus their risk-taking on start-ups and growth enterprises. The subsidiaries are controlled by the parent company and fall within the scope of risk management and internal auditing practised in the Group.

Credit and guarantee risks and risk classification systems

The risk of a credit loss arises when a debtor or another counterparty does not meet its obligations. In SME financing, the reason for credit losses is usually the insolvency of a corporate client. In the case of export credit guarantees, a guarantee loss may stem from the inability or unwillingness of a country, bank or corporate client to meet their payments.

Management of credit risks in SME financing is based on the assessment of each enterprise. Finnvera applies a risk rating system of eight categories, which is based on long-term observation of insolvency events for each risk category. The scale in use has seven categories for operating enterprises and one for insolvent enterprises. When a decision on financing is made, the account manager is responsible for assessing the credit risk, for giving the customer  the risk rating and for drafting the financing proposal. The risk rating of Finnvera's client enterprises is updated at least every second year. The value of any available collateral is also assessed and updated in a similar way.

For granting export credit guarantees, Finnvera classifies countries into eight categories. The classification is based on methods used by export credit agencies. Various factors affect the determination of the country category: assessment of the country's ability to manage its external liabilities; expectations of the future trend of the country's economy; and political stability and the legislative framework. The granting of export credit guarantees is based on country policy. Each country for which Finnvera can grant export credit guarantees is assigned one country policy out of four (A–D) policy categories. Finnvera keeps a close eye on the economic and political situations of countries and makes adjustments to its country policy depending on the changes that have occurred. The category of each country is checked at least once a year.

The taking of bank risks is based on an assessment of each country's banking system and on the risk analyses and risk ratings of individual banks. On the basis of both qualitative and quantitative factors, a risk-taking outline is determined for each individual bank, depending on the risk category. The risk rating of banks is updated whenever needed and always when new projects are introduced.

The taking of enterprise risks is based on an analysis of the enterprise's management, business and finances. The analysis may be concise in the case of small and short-term guarantees. The analysis results in internal risk classification of eight categories, which corresponds in part to the risk classification method used by international rating agencies. The rating is updated when new projects are introduced or otherwise at least once a year.

The credit rating of enterprises is based on the Probability of Default (PD), the Loss Given Default (LGD) and the exposure at default. Finnvera’s financial products are mainly loans and guarantees. Owing to the nature of the products, it is justified to assume that the exposure is used in full at the time of default. In the model for SME financing, the Loss Given Default is the exposure minus the value of collateral pledged, whereas in the model used for export credit guarantees, losses are assessed empirically. In the model for SME financing, the Probability of Default is based on Finnvera’s own historical data, accumulated for almost 20 years, on the probabilities of default in various risk categories. There are considerably fewer loss events in export credit guarantee operations, so the probabilities of default have been derived from the data of rating agencies. The Risk Management Unit monitors the functioning of the risk classification models regularly, and amendments improving them are made whenever necessary.

The credit risk models are utilised, for instance, for the following:

  • assessment and pricing of credit risks when credits are granted;
  • definition of credit policies;
  • determination of the authority to make financing decisions;
  • setting and monitoring qualitative objectives for the credit portfolio;
  • risk reporting on the credit portfolio;
  • internal assessment of capital adequacy and calculation of the expected loss.

In connection with the proposal for financing, the account manager or the credit risk analyst conducts credit classification using a rating tool suited for assessing the qualitative and economic factors of the risk object. The model yields a risk score (0–100) which serves as the base for determining the risk object’s rating category. Apart from this model, the SME Financing Unit uses a mechanical risk rating for smaller risks and as a control. It is based on economic indicators and on the client’s previous payment behaviour to Finnvera. The risk category determined when a proposal for financing is made is confirmed in connection with the financing decision. Whenever necessary, the Risk Management Unit gives its opinion on the risk ratings of the largest exposures.

The account manager is responsible for updating the risk classification. The updating request is sent from the system automatically according to certain criteria or when the period of validity for the classification has expired.

Correspondence between the rating categories of enterprise exposures and the rating used by S&P1)
S&P rating AAA…AA- A+…BBB+ BBB…BBB- BB+…BB- B+…B- C
Finnvera A1 A2…A3 A3-…B1 B1-…B2 B2-…B3 C
1) Because of differences in the rating methods, the comparison with the S&P rating is only suggestive.

Financing decisions are made by the Board of Directors and according to the authorisations delegated by the Board so that the amount of exposure and risk have an impact on the decision-making level. Finnvera has credit committees for export financing and SME financing. Both credit committees make decisions under their own authority and also discuss  proposals submitted to the Board of Directors for decision-making, and issues requiring a specific policy. The CEO chairs both credit committees. The Risk Management Unit participates in the work of the credit committees.

Monitoring of credit risks

Client monitoring takes place through annual analysis of the client enterprise’s financial statements, regular contacts with the client and through monitoring of the client’s payment behaviour and operations. In its monitoring, Finnvera utilises data from its own control systems, from beneficiaries of guarantees, and from public registers on payment defaults. Elevated client risks are taken under special monitoring and a report on the special monitoring is drawn up quarterly. The probability of credit losses and any needs for write-downs are assessed at the same time.

The concentration of risks in counterparties, sectors and countries is monitored regularly. Owing to the purpose of the company’s operations, it is challenging to set precise limits for these risks. In SME financing, credit policy defines the maximum exposure of an individual counterparty. Decisions greater than this maximum must be justified separately to the company’s Board of Directors and, whenever necessary, to the guiding ministry. In export financing, instruments such as reinsurance agreements are used to hedge against risks associated with individual counterparties and concentrations.

Counterparty risks also arise in connection with funding and investments. Finnvera’s goal is to keep the counterparty risks of funding low by working with counterparties with high credit ratings, by setting counterparty-specific limits and by concluding netting and security arrangements associated with derivative contracts.

The risk-taking realised is followed monthly by means of a diverse set of indicators. The main indicators in Finnvera’s risk management are the distribution of current commitments and the change in commitments by risk category, payment delays and non-performing receivables. The level of risk-taking in relation to outstanding commitments, financing granted, and export credit guarantees is described by using the anticipated statistical value of credit losses, the total loss, and the credit losses materialised; these are reported quarterly.

Interest rate and currency risk

At Finnvera, interest rate risks arise when interest rates for borrowing and lending are determined at different times and when there are structural reasons for such risks. The interest rate of domestic lending intended mainly for small and medium-sized enterprises is based on the 6-month Euribor. The interest rate in export financing is based either on the 6-month Euribor or on the 6-month USD-LIBOR. The commencement of interest periods is distributed fairly evenly over the various banking days throughout the year. Borrowing takes place in larger individual sums, and each year there are only a few commencement days for their interest periods. The interest rate risk arising from differences in the timing of interest determination days is controlled by striving to distribute the interest determination days for borrowing evenly over different months. In the event that borrowing is based on a reference rate other than the 6-month Euribor (or USD-LIBOR), the reference rate is converted to the 6-month Euribor (or USD-LIBOR) by using interest rate swaps when the loan is taken.

Structural interest rate risks arise when Finnvera’s own funds, classified as being interest-free, are used in lending and export financing as one source of funding. Finnvera monitors the consequent interest rate risk and, if necessary, takes measures to hedge against this risk.

The entire loan portfolio of Finnvera’s SME financing is denominated in euros, whereas export financing uses both euros and dollars. Finnvera acquires funds from a number of markets and in a number of currencies. To minimise the currency risk, the funds acquired are converted into euros or dollars by using currency exchange rate swaps, depending on the currency of the loans to be paid out in the near future. Cash assets are also invested in relevant currencies at any given time.

Finnvera’s goal is to keep both the interest rate risk and the currency risk low. Any risks arisen are monitored actively, and the company’s management and the Board of Directors receive regular reports on them.

Liquidity risk

Finnvera acquires long-term funding mainly by means of the EMTN programme. The programme is guaranteed by the State and has the same credit rating as the State of Finland. In addition, other sources of funding, such as credit limits agreed or commercial paper programmes, are used whenever necessary. These help distribute the acquisition of funds across several markets and investor groups.

Finnvera’s Board of Directors approves the principles of liquidity management. According to these principles, the liquidity buffer must at any given time cover the payments scheduled for the next six months. Liquid assets are invested in low-risk objects that have a high credit rating. Finnvera’s Asset Management Unit is responsible for practical tasks associated with borrowing and liquidity management. The company’s accumulated own funds are an important element of the acquisition of funds for lending.

The potentially high claims arising from export credit guarantee operations may lead to a sudden need for liquidity that is greater than normally. To prepare for the realisation of such liquidity risks, Finnvera has entered into contractual arrangements, for instance, with the State Guarantee Fund and the State of Finland.

Market risk

Finnvera does not trade in instruments subject to the effect of market prices. However, a small amount of market risk arises in the balance sheet when liquid assets are invested and when measures are taken to hedge against currency and interest rate risks. The aim is to invest liquid assets in instruments where assets can be kept until the maturity of the instrument. Then any changes in market prices during the term to maturity do not affect Finnvera’s financial performance.  Effort is also made to hedge against risks so that the hedge covers the risk as completely as possible, when the net effect of market changes would thus be slight.

Operational risks

An operational risk is a risk of loss caused by insufficient or inoperable internal processes, systems, human resources or external events. Operational risks also include legal risks and the risk of damage to reputation.

The management of operational risks has been developed systematically since 2006, and operational risks have been registered since the beginning of 2007. The Risk Management Unit is responsible for developing the management of operational risks. In practice, the process teams, units and the Information Security Group are responsible for implementing practical measures. Finnvera has a full-time Information Security Manager. Potential risks have been charted and the severity of any consequences they might involve has been assessed for all business areas and support units. In addition, Finnvera has drawn up risk scenarios that, if materialised, would have serious consequences for the company’s operations. Responsibility for the implementation of actions to avert the risk scenarios and other severe risks has been divided between the various organisational units in line with their tasks. The management of operational risks is closely linked to the continuous improvement of quality practised by Finnvera. Finnvera has an ISO 9001 quality certificate. Safeguards are taken against operational risks, for instance, by introducing internal control mechanisms, by developing processes, information systems and the quality of operations, and by taking out insurance against risks.

Operational risks materialised are registered into the management system of operational risks using a risk event portal accessible to the entire personnel. The reasons leading to the events and the measures taken to prevent the recurrence of similar events are described in the application. Finnvera’s management and Board of Directors receive regular reports on operational risks materialised.

Venture capital investments

Within the Finnvera Group, venture capital investments are carried out by Veraventure Ltd and Seed Fund Vera Ltd. Investments made in these companies fall within the scope of Finnvera’s credit risk monitoring.

Risk management by the subsidiaries engaged in venture capital investment is based on enterprise analysis, limiting the size of investments, sharing the risk with other investors, and on sufficient diversification of the investment portfolio. The principles for liquidity investment are the same as those applied by the parent company.

The companies engaged in venture capital investment comply with the recommendations issued by the European Venture Capital Association (EVCA) on the valuation of portfolio companies and fund investments. Investments are carried at fair value in accordance with the above-mentioned recommendations.

Capital management, capital adequacy and external risk weight

Finnvera calculates its capital adequacy for SME financing according to the principles of the Basel III standard method even though Finnvera is not officially required to apply this method. Owing to the nature of its business, Finnvera must ensure that the amount of equity is sufficient in relation to the credit risks taken. The Ministry of Employment and the Economy has set a goal of 12–20 per cent for Finnvera’s capital adequacy. Finnvera also assesses the credit losses that would arise in potential extreme situations and their impact on capital adequacy.

Economic capital is calculated using a credit risk model that corresponds to the models generally used by banks. The model considers the probability of default for the risk objects and the loss resulting from the exposure should the default materialise. Internally, Finnvera’s aim is to attain as much economic capital as is needed to cover the annual losses arising from credit risks and counterparty risks with a certainty of 99 per cent. In addition, capital is reserved for operational risks. Finnvera has assessed that a certainty of 99 per cent is sufficient for the indicator of economic capital because the State is ultimately responsible for Finnvera’s guarantees.

Equity and retained earnings are allocated to the reserve for domestic operations and to the reserve for export credit guarantee and special guarantee operations. The State provides direct support for Finnvera’s domestic financing by paying credit and guarantee loss compensation for some of the credit losses incurred by Finnvera. At present, the compensation for credit and guarantee losses ranges from 35 to 80 per cent, the average being about 55 per cent of the outstanding commitments. In export credit guarantee operations, the State of Finland is responsible, e.g. through the State Guarantee Fund, for the losses that may arise during the financial period and exceed the assets in the reserve for export credit guarantee and special guarantee operations.

On 31 December 2014, the reserve for domestic operations totalled EUR 135 million and the reserve for export credit guarantee and special guarantee operations EUR 436 million.

It has been ensured through legislation that, in the capital adequacy calculations of banks, the risk weight of Finnvera’s guarantees is the same as that for the State of Finland, which could be determined at zero as per 31 December 2014.

Notes to risk management

B1 Credit risks
            Finnvera Group
(EUR 1,000)           31 Dec 2014 31 Dec 2013
Receivables *)    
Loans and receivables from credit institutions 1,104,467 276,443
Loans and receivables from customers 4,642,969 3,710,853
Debt securities 521,172 326,191
Derivatives 26,615 1,130
Total 6,295,223 4,314,617
Total 14,978,240 14,221,629
* Finnish Export Credit’s receivables, EUR 3,319,125 thousand, guaranteed by Finnvera, are included in ‘Receivables from customers’ in the Group (figure corrected on March 16th 2015).
B2 Receivables from customers and guarantees whose value has not impaired
        Domestic financing
        31 Dec 2014 31 Dec 2013
        (EUR 1,000) % (EUR 1,000) %
Risk class        
A1 186 0% 0 0%
A2 4,710 0% 5,093 0%
A3 48,721 2% 58,614 2%
B1 427,770 18% 388,913 15%
B2 1,219,568 50% 1,276,974 50%
B3 569,884 23% 594,298 23%
C 58,529 2% 90,009 4%
D 104,012 4% 116,666 5%
Total 2,433,379 100% 2,530,567 100%
B3 Receivables from customers and guarantees by industry
            Domestic financing
(EUR 1,000)           31 Dec 2014 31 Dec 2013
Rural trades 30,737 30,327
Industry 1,354,361 1,355,021
Tourism 180,682 164,354
Services to business 497,241 619,852
Trade and consumer services 370,358 361,013
Total   2,433,379 2,530,567
B4 Loans and guarantees by area
            Domestic financing
(EUR 1,000)           31 Dec 2014 31 Dec 2013
Finland 2,433,379 2,530,567
Total   2,433,379 2,530,567
B5 Collateral shortage
  Domestic financing
  31 Dec 2014
(EUR 1,000)       Amount of commitment Amount of collaterals Collateral
Collateral shortage-%
Total 2,433,379 778,681 1,654,698 68%
        31 Dec 2013
        Amount of commitment Amount of collaterals Collateral
Collateral shortage-%
Total 2,530,567 764,939 1,772,832 70%
B6 Impaired loans and guarantees for which a guarantee provision has been made  
            Domestic financing
            31 Dec 2014 31 Dec 2013
(EUR 1,000) Total Total
Impairment losses on individually assessed loans and guarantee provisions    
Commitment before the impairment 130,043 159,507
- Impairment loss 46,464 59,365
- Commitment after the impairment 83,579 100,142
Commitment before the guarantee provision 102,915 127,462
- Guarantee provision 33,148 32,562
- Commitment after the guarantee provision 69,767 94,900
Impairment losses on collectively assessed loans and guarantee provisions    
Commitment before the impairment 100,200 118,454
- Impairment loss 39,248 41,787
- Commitment after the impairment 60,952 76,667
Commitment before the guarantee provision 51,523 48,951
- Guarantee provision 20,220 18,455
- Commitment after the guarantee provision 31,303 30,496
B7 Past due receivables
            Domestic financing
(EUR 1,000)           31 Dec 2014 31 Dec 2013
1 day–3 months 11,176 17,076
3–6 months 8,492 16,978
6–12 months 11,605 15,074
Over 12 months 27,771 26,496
Total 59,044 75,624
Past due receivables comprise any interest payments, loan instalments, guarantee commissions and outstanding guarantee receivables that are unpaid at the balance sheet date for all current commitments, including loans subject to any impairment.
B8 Enterprise and bank commitments in export credit guarantee operations, by risk category
    Export financing
(EUR 1,000)   31 Dec 2014 31 Dec 2013
Risk category Enterprise commitments Bank
Total Enterprise commitments Bank
A1 294,665 40,918 335,583 276,500 36,555 313,055
A2 0 194,115 194,115 0 180,982 180,982
A3 1,164,551 104,028 1,268,579 813,220 71,559 884,779
B1 3,818,870 299,989 4,118,859 2,193,665 448,561 2,642,226
B2 4,718,498 82,334 4,800,831 4,311,487 147,112 4,458,599
B3 995,678 123,598 1,119,275 1,701,120 79,674 1,780,793
C 1,822 2,153 3,975 0 1,990 1,990
D 0 0 0 0 0 0
No classification 127,920 0 127,920 134,430 0 134,430
Total 11,122,003 847,135 11,969,138 9,430,422 966,432 10,396,853
B9 Country exposures in export credit guarantee operations, by country category
            Export financing
Country category (EUR 1,000)           31 Dec 2014 31 Dec 2013
0 5,882,134 4,597,777
1 588 2,099
2 870,061 844,095
3 4,710,534 4,460,644
4 499,830 404,014
5 265,377 265,540
6 143,674 116,839
7 91,198 217,192
Total 12,463,396 10,908,200
B10 Bank commitments and enterprise commitments in export credit guarantee operations, by sector  
            Export financing
(EUR 1,000)           31 Dec 2014
31 Dec 2013
Telecommunications 3,775,415 3,262,455
Shipping companies 3,043,251 2,528,590
Wood processing 2,235,340 2,069,929
Metal industry and ore mining 404,327 237,445
Power generation 133,894 137,779
Other 554,987 589,373
Reinsurance 974,790 605,000
Banks and financing 847,135 966,432
Total 11,969,138 10,397,003
B11 Liquidity risk, maturity of liabilities *)
  Finnvera Group
(EUR 1,000) Book value Nominal value < 3 months 3–12 months 1–5 years 5–10 years >10 years
31 Dec 2014              
Receivables from credit institutions **) 670,666 670,666 670,666 0 0 0 0
Receivables from credit institutions, bonds ***) 413,549 412,620 13,000 11,000 388,620 0 0
Receivables from customers 4,592,991 4,592,991 142,439 687,181 2,300,999 1,370,666 91,706
Debt securities 521,172 521,250 513,250 8,000 0 0 0
Total 6,198,378 6,197,528 1,339,355 706,181 2,689,619 1,370,666 91,706
Liabilities to credit institutions 0 0 0 0 0 0 0
Liabilities to others 2,419,517 2,419,517 79,149 233,899 1,183,610 866,500 56,358
Debt securities in issue 2,599,909 2,580,326 0 176,952 1,653,374 750,000 0
Subordinated liabilities 86,139 86,139 0 0 50,000 21,139 15,000
Binding financing offers 0 2,908,090 461,731 1,289,150 1,157,209 0 0
Total 5,105,565 7,994,071 540,881 1,700,001 4,044,193 1,637,639 71,358
Derivatives - receivables   2,873,975 0 176,952 1,947,023 750,000 0
Derivatives - liabilities   2,868,138 0 201,177 1,916,960 750,000 0
Total, net -54,797 5,742,113 0 378,129 3,863,984 1,500,000 0
Guarantees and export credit guarantees*)       
Guarantees   1,122,593 168,255 336,490 527,081 87,857 2,910
Export credit guarantees   12,458,510 571,343 1,468,635 6,339,559 3,516,942 562,032
31 Dec 2013              
Receivables from credit institutions **) 250,271 250,271 250,271 0 0 0 0
Receivables from credit institutions, bonds ***) 0 0 0 0 0 0 0
Receivables from customers 3,710,853 3,710,853 213,646 587,116 1,767,380 1,100,451 42,260
Debt securities 326,191 326,280 326,280 0 0 0 0
Total 4,287,315 4,287,404 790,197 587,116 1,767,380 1,100,451 42,260
Liabilities to credit institutions 0 0 0 0 0 0 0
Liabilities to others 2,107,553 2,107,573 74,571 188,958 1,041,383 771,030 31,630
Debt securities in issue 1,095,753 1,089,949 0 203,276 852,142 34,530 0
Subordinated liabilities 88,029 88,029 0 0 50,000 0 38,029
Binding financing offers 0 2,226,391 508,425 742,935 975,031 0 0
Total 3,291,335 5,511,941 582,996 1,135,169 2,918,556 805,561 69,659
Derivatives - receivables   1,103,359 0 203,276 900,083 0 0
Derivatives - liabilities   -1,121,088 0 -199,550 -921,538 0 0
Total, net -25,609 -17,729 0 3,726 -21,455 0 0
Guarantees and export credit guarantees*)              
Guarantees   1,159,442 154,431 374,461 537,610 88,369 4,570
Export credit guarantees   10,882,420 402,322 1,352,438 5,378,328 3,397,636 351,697
*) The guarantees in the table have been broken down according to their due dates. An individual guarantee may give rise to indemnity at any time during its period of validity. There is no historical information as to when such indemnities have been realized during the life cycle of a guarantee.
**) The item "Receivables from credit institutions" does not include the ERDF assets deposited, EUR 20,252.000 Their use is regulated separately.
The table presents interest repricing dates for interest-bearing receivables and liabilities as well for interest rate and currency swaps hedging the liabilities.
***) Bond investments made in credit institutions.
B12 Market risk sensitivities *)
            Finnvera Group
(EUR 1,000)           31 Dec 2014 31 Dec 2013
Interest rate risk    
Market interest increase 1% 9,860 7,800
Market interest decrease 0,1% -986 -780
Currency risk    
The USD strengthens by 10% against the euro 421 21,784
The USD weakens by 10% against the euro -345 -17,829
*) Direct changes in interest rates and exchange rates would have an impact on financial performance, as shown in the table, over the next 12 months.

The changes in fair values of liabilities at fair value through profit or loss and the interest rates of the derivatives hedging them offset each other and therefore they do not have an impact on the profit or loss.

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