The loan portfolio is rated
pursuant the rules issued by the SHCP and following the methodology established
by the CNBV. For the revolving consumer loan, auto loan and mortgages portfolios
the Institution applies internal rating methodologies with an advanced approach
based on NIF C-16, and for the enterprise and corporate loan portfolio the
Institution applies an internal rating methodology with a basic approach also
based on NIF C-16, all of them informed to and authorized by the CNBV.
These regulations also established
general methodologies to grade and record of allowance for loans and credit
losses for each type of credit.
Credit Institutions must apply,
quarterly on March, June, September and December, the established methodology
to rate the commercial loan book and record in its financial statements the
allowance for loan and credit losses at the end of each month. Likewise, for
those subsequent months to the end of each quarter, the correspondent rate to
the credit in question used at the end of the immediate previous quarter could
be applied on the amount of the debt recorded the last day of the mentioned
months. The allowance for loan and credit losses that exceed the required
amount to rate the loan portfolio will be canceled on the date in which the
next quarterly rating is done against the results of that period; likewise, the recovery on the loan portfolio
previously written off is recorded against the current period results.
General Description on
the Standard Methodologies set forth the CNBV
The standard methodologies to rate
the consumer and commercial loan books (excluding credits for project finance
with their own source of payment) establish that the reserves for those
portfolios are determined based on the standard estimation of expected loss for
the next twelve months for those loans classified as stage 1 and 3, and a
lifetime expected loss for those classified as stage 2.
Given the adoption of IFRS9 in January 2022, these methodologies state that to estimate such expected loss, the
probability of default, the loss given default and the exposure at default are
evaluated and the result obtained by the multiplication of these three factors
is the estimation of the expected loss which is equal to the amount of
provisions required to face the credit risk for those loans classified as stage
1 and 3
For those loans classified as stage 2, a
lifetime reserve is calculated according to Standard methodologies, which consider in their estimation for
the remaining term of the loans and stated annual interest rate along with the
probability of default, the loss given default and the exposure at default.
For revolving consumer, non revolving consumer and mortgages, it is
assumed that at the moment of default, only the minimum payments are made until
the settlement of the credit balance (median life estimation). Finally, the
reserve amount to consider will be the maximum of the lifetime reserve and the
12 months reserve.
Depending on the type of portfolio, the probability of default, the loss
given default and the exposure at default for the standard methodologies are
determined considering the following:
Probability of default
- Non revolving consumer.- it takes into
consideration the current delinquency, payments made in respect to last
balance, type of credit, among others.
- Commercial.- according
to the type of debtor, considers credit experience factors, agency ratings,
financial risk, socio-economic risk, financial strength, country and industry
risk, market position, transparency, corporate governance standards, and other qualitative
aspects of the business.
Loss Given Default
- Non revolving
consumer.- according to the number of unfulfilled payments.
- Commercial.- considers financial
and non-financial real guarantees and guarantors.
Exposure at default
- Non revolving
consumer.- considering the credit balance to the rating date.
- Commercial.- for
revocable loans it takes into consideration the credit balance at the rating date. For
irrevocable loans, the current level of use of the credit line is taken into consideration
to estimate how much the use of such line would increase in case of default.
According to the standard methodology established by the CNBV to rate
project finance with its own source of payment credits, the rating must be
carried out analyzing the risk of the projects in the pre-operational and operational
stage, evaluating the overrun, the cash flows of the project, and other qualitative
aspects of the business.
Internal Rating
Methodologies based on NIF C-16
According to Annex 15 and Annex 15 Bis of the CUB (Circular Única de
Bancos), Institutions may use internal models to calculate capital requirements
and reserves, the IRB approach is used for the former and IFRS9 for the latter.
The internal methodologies used by the Institution, as well as the standard
methodologies have a twelve-month expected loss for those loans classified as
stage 1 and 3 and a lifetime expected
loss for those classified as stage 2. Such internal methodologies could have
the following approaches:
- Basic.-the probability
of default is estimated considering internal methodologies, while the
parameters of loss given default and exposure at default are applied according
to the standard model.
- Advanced.- the
probability of default, the loss given default and the exposure at default are
estimated applying internal methodologies.
Revolving Consumer Loan
Portfolio
The Institution received approval
from the banking regulator since January 2018 to apply an internal based rating
methodology with an advanced approach for the revolving consumer portfolio.
This methodology is used to estimate the reserves and capital requirements for credit
risk, according to the regulation.
For revolving consumer (credit
card), it is assumed that at the moment of default, only the minimum payments
are made until the settlement of the credit balance (median life estimation).
For this methodology, the
probability of default, the loss given default and the exposure at default are
determined considering the following:
Probability of default
- There
are differentiated models according to internal variables which take into
consideration aspects as the intensity of use, internal operation, customer
loyalty, seniority of the account and external behavior variables such as
maximum delinquency rate and use with other financial institutions in different
time horizons.
Loss
given default
- According to the number
of unfulfilled payments
Exposure
at default
- It takes into
consideration the current use of the credit line and the level of default to
estimate how much the use of such credit line would increase in case of
default.
Auto Loan Portfolio
The Institution received approval
from the banking regulator since January 2020 to apply an internal rating
methodology based on an advanced approach for the Auto Loan portfolio. This
methodology is used to estimate the reserves and capital requirements for credit
risk, according to the regulation.
For this methodology, the
probability of default, the loss given default and the exposure at default are
determined considering the following:
Probability of default
- It
considers the unfulfilled payments, customer’s years of experience with the
institution and the age of the credit, as well as external behavior variables:
maximum delinquency and observed usage in other financial institutions.
Loss
given default
- There are
differentiated models for each segment based on the ratio “accounting balance /
amount of the guarantee” that, through different periods of time, brings to
present value the costs associated with the recovery (recoveries, reductions
and discounts), and they are expressed as a percentage of the exposure at
default.
Exposure
at default
- It considers the credit
balance at the time of the rating.
Mortgage
Since July 2023, the institution
has been authorized to use an internal methodology under an advanced approach
for the Mortgage “Origen Banorte” portfolio This methodology is used to
estimate the reserves and capital requirements for credit risk, according to
the regulation.
For this methodology, the
probability of default, the loss given default and the exposure at default are
determined considering the following:
Probability of Default
- It
considers the type of credit, the ratio of book balance/updated value of the
property under CUB guidelines, as well as external behavioral variables:
maximum delinquency and usage in other financial institutions observed over
different time periods.
Loss given default
- Differentiated
models are used for each segment based on the ratio of book balance/ updated
value of the property under CUB guidelines. These models bring the costs
associated with recovery (recoveries, write-offs, and discounts) to present
value over different time periods and are expressed as a percentage of the
exposure at default.
Exposure at Default
- It
considers the credit balance at the time of the rating.
Enterprise Loan
Portfolio
The Institution received approval from the banking regulator to apply an
internal rating methodology with a basic approach starting on January 2019 for
the Enterprise Loan Portfolio (individuals with business activity and legal
entities different to states, municipalities and financial institutions, both
with annual sales greater than or equal to 14 million UDIs). This methodology
is used to estimate credit risk reserves and capital requirements according to
regulation.
For this methodology, the probability of default is determined
considering the following:
Probability of default
- Credit behavior,
financial risk, debt restructuring, economic sector, quality of the business management,
the Institution target markets and others qualitative aspects of the business.
(Last modified January 24, 2024)
