Specific Risks in Agribusiness: their Assessment and Monitoring MKB Banks Experience

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Specific Risks in Agribusiness their Assessment
and Monitoring MKB Banks Experience

• Péter Cserfalvi, General Manager
• Risk Office, MKB Bank

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MKB Snapshot

• No 3 Bank in Hungary by TA (EUR6.4bn, Q3 05)
• Owned by BayernLB, Munich
• Traditionally corporate bank but
• increasing focus on retail clientele and SMEs
  (including agriculture)
• Currently 50 branches, another 15 to 20 in 2006
• A1 LT rating from Moodys

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Risk Environment of the Hungarian Agriculture

• 450mn strong single market
• Part to, and beneficiary of, CAP
• New budget 2007-2013
• WTO talks
• Extremely sensitive sector in business and
  political aspects

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System of Sudsidies 1.

• SAPARD completed, HUF65.5bn subsidies used during
  pre/accession phase
• Other programmes subsidised from domestic
  sources
• Development loan programme
• Drought Remedy loan programme
• Capital Increase loan programme
• Agricultural Accession loan programme
• Agricultural Development loan programme

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System of Subsidies 2.

• National Development Plan (2004-2006)
• Role of AVOP (Agricultural and Rural Development
  Operative Programme)
• Subsidies amount to HUF105bn during 2004-2006
• 75 from EU
• 25 from domestic sources
• II. National Development Plan (Europe Plan) for
  the years 2007-2013

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Risk environment

• Long and short term uncertainties re major future
  trends of the sector
• Impact of cycles ? very sensitive to changes
• Very high level of competition in many areas
• Changing nutrition moods
• Need for technological change
• Specific structure of expenditures hard to change
• Relatively low barriers to enter the sector
• Desperate situation of businesses hampered by
  lack of capital

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General Principles of Financing

• Counterparty rating, including sector-specific
  issues
• Clients financing needs and their feasibility
• Proper financing forms and construction
• Granular portfolio, but
• large impact of sector specific effects due to
  general weaknesses

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Specifics of Risk Assessment of the Agricultural
Sector 1.

• Significant development needs
• Technological advancement, structural changes
• Environment protection
• Large number of small private enterprises
• Establishment of Producers Groups (TCS)
  Production and Realisation Cooperatives (TÉSZ)
• Fairly high lobbying potential
• Maximal possible use of subsidies
• Difficulties in determining the underlying
  creditworthiness of clients/owners

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Specifics of Risk Assessment of the Agricultural
Sector 2.

• Barriers to price increases
• Diversification from agribusiness
• Compliance with terms and conditions of subsidies
• Subsidies and guarantee schemes good or bad?

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Basel2-compliant Ratings

• Basel2 project
• BayernLB assistance
• PD, LGD, EAD, EL
• Data history
• Presumably lower ratings for agribusiness

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Monitoring

• Not really sector specific, but
• taking note of lower credit
• Early warning systems
• Simplified / detailed monitoring
• Intensive / problematic treatment
• Agribusiness overrepresented in intensive /
  problematic exposures
• Control of decisions more difficult

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• Banks general assessment agribusiness ?
  high-risk sector

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Financing Needs ? Collateral Coverage

• Strong collateral coverage needed but hard to
  meet if at all
• Way out
• Involvement of guarantee schemes (eg. AVHGA)
  depending on clients availability, but
• system of enforcement needs further refinement
  and closer cooperation
• Assignment of assurances to Bank
• Assignment of revenues to Bank
• Post-financing preferred, including warrants
• Pre-financing of subsidies
• Other innovative forms of financing?

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Summary

• Agribusiness ? high risk of financing
• Global challenges, local solutions
• Risk-free collateral base preferred ? or
  strengthening the collateral base through
  involvement of guarantee schems
• Proper client and transaction monitoring
• Impact of MA increasing
• Ambiguous outcome of subsidy and guarantee schemes