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Capitalia

"The project's added value is that it has provided us with immediate and easy access to a collection of knowledge that we have developed, structured and processed on a stable and efficient central platform."

Luca Di Marco
Rating Agencies manager in Ratings and Capital Management
Capitalia Gruppo Bancario

In 2002, as part of the larger project of convergence towards Basel II standards, Capitalia launched a project to establish credit risk evaluation methodologies based on internal rating models. Business intelligence (with BusinessObjects XI, Web Intelligence, Crystal Reports and Dashboard Manager) provides descriptive analyses of results to various levels of detail.

Basel II is an agreement reached in 2004 by the governors of the Central Banks of the ten most industrialized nations and is a standard covering the whole international banking world to guarantee stability and protect its role. The agreement stipulates that the banking institutions adopt a common monitoring standard. In particular the first pillar of the standard identifies a minimum capital requirement regarding credit risk which is quantified in the internal rating based approach on the basis of an internal rating system certified by the Central Bank.

Challenge

Capitalia and credit risk

"When the Capitalia group started, one of our priorities was to have measurement and credit risk control processes which would meet our own management needs before even complying with the Basel II agreements", Luca di Marco recalls.

In 2002, we therefore launched the project to develop credit risk evaluation methods based on internal rating models. After the initial development phase of the internal rating models, these were scaled down in the credit processes. For the more complex customer sectors the rating assignment process is performed by the internal Rating and Pricing Agency which is responsible for quantifying the credit risk and is organizationally independent from the bank's credit and commercial structures.

The internal Rating & Pricing agency at the Group's top level focuses on the large corporate, banks and sovereign risk sectors while the internal Rating and Pricing agencies in each individual bank concentrate on the mid-sized corporate and small business sectors, working in collaboration with the central headquarters Rating and Pricing Agency. The internal Rating & Pricing Agency also supplies spread risk adjusted, not binding for commercial purposes, which accords with the remuneration for credit risk."

Approach

Methodologies and credit evaluation process

The workflow for the rating assignment process is quite complicated: it starts with collection and reclassification of the financial and qualitative information according to the models developed, to give the statistical rating. The other market indicators – external benchmarks or ratings - are then controlled, as well as the equity and fixed income markets. The company is then analyzed by reviewing the accounts and taking into consideration the reference market, the geographical area, comparable companies, etc. Other qualitative aspects such as management, industrial plans, products, fixed investments, any parent or government support and the relationships between the company in question and the bank are also evaluated. The final rating that is assigned combines all the information that has been analyzed into a single assessment.

The rating systems must respect some requirements laid down by Basel II Accord: integrity (separation of who proposes, manages and evaluates the operation), formalization and completeness of documentation, traceability and possibility of replicating the process, homogeneity of the evaluation. All this makes information management of strategic importance.

Resutls

Information requirement: the rating agency project

Di Marco emphasizes: "we need to have evidence of the activity carried out and the results: how many rating assessments have been completed? What information has been used? What is the credit risk of the individual dealer and the complete portfolio?

It is important to ensure ex post verification that the process is effective and efficient. BusinessObjects reports and dashboards enable us to track what is happening in a user friendly way."

The Rating Agency project was developed to monitor the ratings given and to compare them with evaluations coming from the market. Analyses can be divided by time period, sector or subsector down to a single dealer. The descriptive analysis gives instant and time evidence (with transition matrices), on the ratings given by individual dealers with reference to credit portfolios. The verification and Back Test analyses can show the differences between the internal evaluations (differences between ratings calculated with statistical models and final ratings assigned) and the ratings of the international agencies. The Credit Quality Monitor supplies evidence on the historical progress of the assessments assigned and the other relevant credit information: assessments made by international rating agencies, benchmarks and comparables rating, market information (Credit Default Swap, fixed income spread, market trends, etc.). Finally a fourth module focuses on the activities and results of the ratings assigned by the internal rating agencies of the Group Banks which operate on the mid-sized corporate and small business sectors.

Selection of technology supplier

BusinessObjects XI was the selected information management system. Di Marco says: "We are keeping BusinessObjects because it was already being used in Ratings and Capital Management to analyze Active Portfolio Management. We have confirmed our choice because it was easier to use a product that was already in existence, and for its clear benefits: users can display different portfolios with the same interface and with the same underlying logic." The solutions used are Web Intelligence and Crystal Reports for reporting, Dashboard Manager for dashboard management and measuring KPIs.

Users from the Internal Rating Agency access the system via a gateway under a user profiling system. The gateway is to be extended, using the profiling system for access, to the commercial Banks of the Group and the other departments for credit risk related areas (Risk Management, credits, credit monitoring, commercial).

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Quick Facts

• Capitalia:
  Capitalia is the third largest Italian banking group, founded in 2002 as a result of the merger between the Banca di Roma and Bipop-Carire banking groups. The banking arm of the company is made up of the holding company, three commercial banks (Banca di Roma, Banco di Sicilia and Bipop), an investment bank (MCC - Medio Credito Centrale) and Fineco, a bank which manages the innovative distribution networks, the online channel and the network of financial promoters. In 2006 Capitalia's market capitalization stood at over 18 billion euros, with revenues of 5.5 billion euros, a record net profit of 1,162 million euros (up 12.3% compared with 2005) and an ROE of 15.5%.