The Company’s risk management function has been built over the years by bringing together specialized knowledge of risk management in financial institutions, business know-how and the experience of its teams, even though Tanner has professionals specifically dedicated to each different risk area.
Tanner’s loan approval policies and processes are tailored to each market and business segment by taking into consideration their characteristics and inherent risks. The policy is to maintain an integrated vision of risk management and return, incorporating both the Company and its subsidiaries in this analysis.
The strategy incorporates the risk tolerance of each business line and aligns all commercial areas using models, processes, and tools for assessing, measuring, and controlling risk. The Board is continuously made aware of how risks are evolving and what the proposed action plans are to address important deviations in risk indicators and to enforce compliance of risk standards and regulations.
Credit risk represents the probability of economic and/or financial loss faced by the Company if a customer or counterparty of a financial instrument does not comply with its contractual obligations. Such risk is inherent in the Tanner’s lines of business.
Tanner Servicios Financieros S.A. manages its credit risk independently by each business line – Factoring, Corporate Lending, Leasing and Auto-Financing – based on each customer´s expected income, available financial information and credit history, if any. This analysis also includes macroeconomic expectations and forecasts for the sector in which the customer operates and, for Factoring, it also considers the financial position and outlook of the debtor.
The Company proactively monitors credit quality in order to identify in advance any possible changes in a counterparty’s payment capacity and take preventative or corrective actions, as needed.
Tanner employs a differentiated approach to its loan analysis and approval processes, which are tailored to each market segment and type of business. The Company has built a robust customer approval process and has developed significant internal capabilities to assess the risk profile of its customers, which enables it to minimize the inherent risks to which the Company is exposed. Ongoing control and monitoring of credit risk is the basis for proactive portfolio management and allows Tanner to identify potential sources of risk before an actual impairment takes place. To accomplish this, Tanner Servicios Financieros S.A. uses a set of reviews and processes, including:
Another important and complementary aspect of the credit risk assessment is the quality and quantity of guarantees required. One of the Tanner’s policies has been to use sound guarantees as a second source of payment in the event of default. A series of conditions have been defined by the Company for each type of business:
The Company determines the credit quality of financial assets using internal ratings systems. The rating process is linked to the internal approval and monitoring processes and is carried out in accordance with risk categories established by current regulations (Auto-Financing and Leasing). Credit quality is continuously updated based on the evolution of customers and their environments, considering aspects such as commercial and payment behavior, as well as current financial information.
Tanner Servicios Financieros S.A. also reviews customers within particular industries that could be (potentially) affected by macroeconomic or sector-specific variables. Such reviews allow Tanner to establish in good time any necessary provisions that are sufficient to cover losses from potentially uncollectable loans.
In Tanner Investments Division, in particular for Tanner Corredora de Bolsa S.A., credit risk stems from the risk that the counterparty to a contract defaults on its contractual obligations, leading to an economic loss. In order to control this risk, Tanner has collection procedures that enable it to control the terms and exposure amounts of each customer. To reduce the effects of credit risk, the brokerage subsidiary uses a series of internal risk policies that vary by customer type and product.
02. FINANCIAL RISKSLiquidity risk is defined as the Company’s inability to comply with its obligations without incurring large losses or discontinuing normal lending operations with its customers. It arises from mismatched cash flows, which occur when the cash outflows to pay for liabilities are greater than inflows from investments or loans. Liquidity risk could also be generated by a customer not paying amounts owed at or before the committed loan maturity dates.
Tanner manages liquidity risk on a consolidated level. Its main generator of solvency are cash flows from operating activities (collections), in addition to a series of diversified funding sources such as bonds – both local and international – with a defined payment schedule; unsecured bank lines of credit, mainly short-term and regularly renewed; and commercial paper.
Tanner Servicios Financieros S.A. has a daily cash flow management system that includes a simulation of all asset and liability maturities in order to anticipate cash needs. There is also a higher monitoring body within Tanner, the Asset and Liability Committee (ALCO), which meets on a monthly basis to review market conditions and expectations, and to define actions accordingly.
The indirect subsidiary Tanner Corredora de Bolsa S.A., is subject to regulatory liquidity indicators known as the General Liquidity Index (Índice de Liquidez General) and the Intermediation Liquidity Index (Índice de Liquidez por Intermediación). In accordance with CMF requirements, the subsidiary has always complied with these indicators.
Market risk is defined as exposure to economic losses arising from adverse movements in market factors such as price, interest rate, currency and indexation, among others, that can affect the value of any recorded transaction that has not been duly hedged.
Price risk is defined as the risk incurred by variations in the value of investments, mainly in bonds and stock. It arises from the chance that the return could be less than the amount invested when the debt instrument is sold. This occurs when the return generated by the instrument is less than the return expected by the market.
The Company has investments in ETFs and corporate bonds with VaRs that are insignificant with respect to the Company’s equity.
Interest rate risk is defined as the risk to which an organization is exposed as a result of engaging in financial transactions whose value is subject to, among other factors, movements in interest rates over time.
Tanner Servicios Financieros S.A. has a portfolio of trading and hedging derivative instruments used to mitigate the risk of interest rate and currency fluctuations. The portfolio of trading derivatives, given its very short-term maturity structure, has a low interest rate risk with marginal impacts on profitability. Hedging derivatives are intended to hedge a large portion of liabilities structured in foreign currency and/or with variable rates (Libor), thus limiting the exposure to this risk.
Currency risk is defined as exposure to potential losses from changes in the value of assets and liabilities due to changes in exchange rates. The Company, as a result of its business activities and its need for a diversified funding structure, has a currency mismatch between its assets and liabilities that is managed on a daily basis and mitigated by using derivative instruments. Tanner also has obligations in Swiss francs, with its corresponding currency risk being completely hedged. As an internal risk mitigation policy, the mismatch in foreign currency cannot exceed the equivalent of 2.5% of equity. This limit has never been surpassed by Tanner.
Indexation risk is the exposure of assets and liabilities denominated in Unidades de Fomento (“UF”) that could generate losses because of changes in the value of the UF. The Company, because of its business activities and its need for diversified funding, maintains assets and liabilities in UF. Mismatches are managed on a daily basis and fluctuations are mitigated using derivative instruments. As an internal risk mitigation policy, the mismatch in UF cannot exceed the equivalent of 30% of equity. This limit has not been surpassed.
The Basel Committee on Banking Supervision defines operational risk as the “the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events, differ from the expected losses.” This definition includes legal risks but excludes strategic and reputational risks.
Therefore, Tanner Servicios Financieros S.A. has mapped out all its processes throughout the entire organization and identified those considered critical. Furthermore, the Company has generated a matrix of inherent and residual risk for each of its business lines, identifying critical points and mitigating controls.