CREDIT RISK
Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to fulfil its contractual commitment or obligation to CWB. Credit risk is comprised of default risk and credit migration, or downgrade risk. Credit default risk is defined as the potential that a CWB borrower or counterparty will fail to meet its obligations in accordance with the agreed terms. Credit migration or downgrade risk refers to the risk of deterioration of credit quality of a borrower or counterparty.
Risk Overview Our credit risk results from granting loans and leases to businesses and individuals. Our credit risk management culture reflects the combination of policies, standard practices, experience and management attitudes that support prudent growth within chosen industries and geographic markets. Underwriting standards are designed to ensure an appropriate balance of risk and return and are supported by established loan exposure limits in areas of demonstrated lending expertise. To minimize potential loss, most of our loans are secured by tangible collateral. Our approach to managing credit risk has proven to be very effective, and we have a history of low write-offs as a percentage of average loans, including through past periods of financial uncertainty. Our strategy is to maintain a quality, secured and diversified loan portfolio with experienced personnel who provide a hands-on approach in granting credit, account management and timely action when problems develop. We target lending to small- and medium-sized businesses, and to individuals. We continue to pursue further geographic and industry diversification through growth of full-service client relationships in targeted industries across our national geographic footprint. Relationship banking and ‘know your client’ are important tenets of effective account management. Earning an appropriate financial return for the level of risk is also fundamental.
For additional information, refer to the Loans and Credit Quality sections of our MD&A.
Risk Governance Credit risk is managed under the three lines of defence framework and oversight is provided by the Board Risk Committee. Our lending business lines and support areas assess and manage credit risk associated with their activities as the first line of defence. The credit approval process is centrally controlled, with all credit requests that exceed predefined thresholds submitted to Credit Risk Management for adjudication, as the second line of defence. Credit Risk Management is independent of the originating business. Independent review of the adequacy and effectiveness of governance, risk management and control over credit risk is provided by Internal Audit as the third line of defence, with direct reporting provided to senior management and the Audit Committee.
Risk Management We have comprehensive credit risk management policies, approved by the Board Risk Committee, that cover risk concentration limits, approval of credit applications by authority level, assignment of risk ratings based on a standard classification system, ongoing management and monitoring requirements, management of less than satisfactory loans and risk-based pricing decisions. Our lending business is supported by qualified and experienced teams. Credit policies, standards, guidelines, and delegated lending authorities and limits are well-communicated across our business lines to lenders and other teams engaged in the credit granting process. The Board Risk Committee delegates discretionary lending limits to the CEO and CRO, for further specific delegation to senior officers. Requests for credit approval beyond the lending limit of the CEO/CRO are referred to the Group Credit Risk Committee or the Board Risk Committee’s Loan Adjudication Panel. Risk diversification is addressed by establishing portfolio limits by geographic area, industry sector and product. Our policy limit loans to connected corporate borrowers to not more than 10% of our shareholders’ equity. Under the Enterprise Risk Appetite policy, the single credit risk exposure lending limit is $75 million. Our credit risk appetite for certain quality connections with investment grade credit ratings of A- or better, that confirm debt service capacity and loan security from more than one source is $200 million. The connection limit is $150 million for borrowers with credit ratings of BBB+. CWB clients with larger borrowing requirements that would otherwise be within our credit risk appetite are accommodated through loan syndications with other financial institutions. On a quarterly basis, we complete a review of risk diversification by geographic area, industry sector and product measured against assigned portfolio limits. We employ a variety of risk measurement methodologies to measure and quantify credit risk for our business and personal credit portfolios. Within our loan portfolios, borrowers are assigned a borrower risk rating (BRR) that reflects the credit quality of the obligor using industry and sector-specific risk models and expert credit judgment. Our credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both client- and transaction-level risk decision-making and as key inputs for risk measurement. The secured nature of our lending portfolio with conservative loan-to-value ratios reduces our credit risk exposure. The extent of risk mitigation provided by borrower-provided security depends on the amount, type and quality of the collateral. Security can vary by type of loan and may include real property, working capital, guarantees, or other equipment. Specific requirements related to collateral valuation and management are set out within our credit risk management standards. All credit risk exposures are subject to regular monitoring. At least annually, we perform a review of credit risk-rating classifications for our business and personal exposures, with the exception of personal loans and single-unit residential mortgages, to support early detection of credit migration or unsatisfactory loans. Management of higher-risk loans is delegated to the Special Asset Management Unit, a specialized loan workout team that performs regular monitoring and close management of these loans. The CRO reports quarterly to the Executive Risk Committee and the Board Risk Committee to provide a summary of key information on credit risk, including material credit transactions, compliance with limits, portfolio trends and impaired loans. Reporting on significant unsatisfactory accounts is completed on a quarterly basis, which includes an overview of action plans for each unsatisfactory account, a watchlist report on accounts with evidence of weakness and an impaired loan report covering loans that show impairment to the point where a loss is possible.
50 | CWB Financial Group 2022 Annual Report
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