The rating process in Bank Millennium is based on the following principles:
- Awarding risk grades to all customers and credit exposures;
- All credit decisions should be preceded by awarding a risk grade to the client;
- In the retail segment. the rating process is based on PD scoring/rating models;
- The rating process is separated and independent from the credit decision process.
The presented rating principles apply to all categories of retail exposures: retail exposures to individuals secured by residential real estate, qualifying revolving retail exposures and other retail exposures.
The class of retail exposures to individuals secured by residential real estate include exposures which are mortgage loans or home equity loans granted to retail clients (small businesses and private individuals) and secured by mortgage.
The class of qualifying revolving retail exposures includes exposures to natural persons which are unsecured, renewable, with total exposure not exceeding EUR 100.000 and which meet the requirement of low volatility of loss rates.
All the retail exposures that do not qualify to the above categories are treated as other retail exposures.
In the rating process, the powers are allocated as follows:
- Data input;
- Verification of data;
- Awarding of the final risk grade (automated decision).
Model-based risk grades and procedural ratings are awarded automatically and are not subject to expert adjustments.
In the rating process, the Bank uses data from various available sources:
- internal sources (Bank’s IT systems);
- external sources (Biuro Informacji Kredytowej S.A.);
- data received from customers.
With respect to probability of default (PD) models for retail exposures, there is a rating system in place for microbusinesses and a rating system for private individuals. Both systems use behavioral scoring models and application scoring models designed for specific client and/or product groups. Procedural ratings are awarded to clients showing signs of deteriorating borrowing capacity and creditworthiness or with past due debt.
A procedural rating has the priority in use. If the client has no procedural rating then the behavioral rating should be used, provided that it has been awarded.
Behavioral rating is awarded for the first time after three months of the client’s cooperation with the Bank and then monthly, provided that the client’s accounts meet the requirements of the behavioral model.
If the client has no behavioral or procedural rating then the application rating should be used.
Loss Given Default (LGD) models have been built for the following two portfolios:
- unsecured portfolio for retail clients.
- portfolio secured by residential real estate for retail clients.
Pursuant to CRR, and its subsequent amendments, banks must estimate LGD parameters using data on defaulted exposures from all the available sources, taking into account all information that is significant for the estimation of economic loss levels.
Accordingly, the Bank has estimated LGD parameters using a database that contains all the defaults resulting from quantitative and qualitative premises included in default definitions.
According to the LGD calculation methodology, the main factors in the calculation include: probability of cure or completion of the client recovery process, value of recoveries, costs and discount rate.
The Bank has taken the following approach to building LGD models:
- Establish homogenous risk pools of transactions;
- Estimate the probability of different paths from the default status (cure, incomplete, liquidated);
- Estimate loss parameters for each path of cure from default.
- Exposure at Default (EAD) models / CCF models
An EAD model has been built for retail portfolio exposures. When estimating EAD, exposure at default was compared to the value of the limit and the book value of the exposure observed one year before the default event. Credit Conversion Factor (CCF) parameters have been calculated for product groups for which an off-balance sheet exposure could occur and where the Bank had a significant number of observations that enabled statistical conclusions to be drawn. i.e. for overdraft limits and for credit cards. In case of guarantees, where the number of observations was too low to carry out statistical analyses, a conservative CCF value was used. No EAD model was developed for the RRE portfolio due to immaterial number of observations.