3.6 Risk management

Enterprise risk management as a fully integrated risk management process was systematically applied in 2018 at all levels of the Corporation. The three Divisions, the Corporate Staff, and all significant Corporate Companies prepared a risk map in May and November of the key risks with regard to strategy, markets, operations, management and resources, financials as well as sustainability. The likelihood of the risk occurring was classified into four categories. Where possible and appropriate, the identified risks were subject to a quantifiable assessment, taking into consideration any measures already implemented. Alternatively, a qualitative assessment of the risk exposure was applied.


The Risk Council, consisting of representatives of the Divisions and the Corporate Staff and headed by the Chief Risk Officer, held two meetings. The topics of these meetings were the optimization of the risk reporting of sustainability risks, the reporting and valuation of IT risks as well as the analysis of the risk maps.


In accordance with the semi-annual risk reporting process, the Executive Committee and the management of the Divisions discussed the risk maps twice during the year under review. They defined at the appropriate level the key risks of the Corporation, the Divisions and the GF Corporate Companies, and determined adequate measures to mitigate those risks. The Board of Directors tabled the topic of enterprise risk management in September 2018 to analyze the corporate and divisional risk maps as well as to define the key risks and the risk mitigation measures.


The multi-stage procedure, including workshops at division management, Executive Committee and Board of Directors level, has proven to be effective, as has having Internal Audit assess the risk maps prepared by the GF Corporate Companies.



Key risks were identified as follows: slow-down of the economic growth in China, political and economic uncertainties due to the trade dispute between the US and China, and the insufficient profitability of some GF Casting Solutions plants in Europe. Measures to reduce these and other risks were defined and are being implemented in line with the strategic targets of the Corporation and the three divisions.

Financial risk management

Financial risks overview

 

Risk source

 

Risk management

 

 

 

 

 

a) Credit risk

 

default of a counterparty: from trade accounts receivable or from bank deposits

 

diversification and credit assessments

b) Market risk

 

 

 

 

– Currency risk

 

sales and purchases as well as financing Corporate Companies in foreign currencies

 

selling and producing in functional currency (“congruency” rule) and hedging by means of forward exchange contracts

– Interest rate risk

 

insignificant

 

not necessary

– Price risk

 

insignificant

 

not necessary

c) Liquidity risk

 

not enough liquidity to pay due liabilities

 

constant monitoring of liquidity, liquidity reserves and unused credit lines

The Board of Directors bears ultimate responsibility for financial risk management. The Board of Directors has tasked the Audit Committee with monitoring the development and implementation of the risk management principles. The Audit Committee reports regularly to the Board of Directors on this matter.

The risk management principles are geared to identifying and analyzing the risks to which the Corporation is exposed and to establishing the appropriate control mechanisms. The principles of risk management and the processes applied are regularly reviewed, taking due regard of changes in the market and in the Corporation’s activities. The ultimate goal is to develop controls, based on the existing training and management guidelines and processes, that ensure a disciplined and conscious approach to risks. The Audit Committee is supported by the Head of Finance & Controlling in this task.

Owing to its business activities, GF is exposed to various financial risks such as credit risk, market risk (including currency risk, interest rate risk, and price risk), and liquidity risk. The following sections provide an overview of the extent of the individual risks as well as the goals, principles, and processes employed for measuring, monitoring, and hedging the financial risks.

Credit risk

The maximum credit risk as of the balance sheet date was as follows:

CHF million

 

2018

 

2017

 

 

 

 

 

Trade accounts receivable

 

697

 

754

Cash and cash equivalents

 

533

 

624

Other accounts receivable 1

 

32

 

31

Accrued income

 

15

 

16

Other financial assets 2

 

91

 

12

Derivative financial instruments

 

3

 

5

Total

 

1’371

 

1’442

1 Without tax credits.

2 Relates to loans to third parties, security deposit and long-term invested securities for the settlement of pension liabilities.

GF invests its cash worldwide and predominantly as deposits in leading Swiss and German banks with at least a BBB– rating. In accordance with the investment policy of GF, these transactions are entered into only with creditworthy commercial institutions. Generally, the investments have a maturity of less than three months. In addition, GF Corporate Companies have current bank accounts. Cash is allocated to several banks to limit counterparty risk. The maximum amount per bank is defined in relation to the ratings of the respective banks. 

Transactions involving derivative financial instruments are also entered into only with major counterparties with at least a BBB– rating. The purpose of such transactions is to hedge against currency risks and price fluctuations for the purchase of raw materials and electric power for the Corporation.

The danger of cluster risks on trade accounts receivable is limited due to the large number and wide geographic spread of customers. The extent of the credit risk is determined mainly by the individual characteristics of each customer. Assessment of this risk involves a review of a customer’s creditworthiness based on its financial situation and past experience. In monitoring default risk, customers are classified according to relevant factors, such as geographic location, sector, and past financial difficulties.

The maximum credit risk on financial instruments corresponds to the carrying amounts of the relevant financial assets. GF has not entered into appreciable guarantees or similar obligations that would increase the risk over and above the carrying amounts.

Currency risk

Foreign exchange rates

 

 

 

Average rates

 

Spot rates

CHF

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

1

AED

 

0.267

 

0.268

 

0.268

 

0.265

1

ARS

 

0.037

 

0.060

 

0.026

 

0.052

1

AUD

 

0.731

 

0.755

 

0.695

 

0.763

1

BRL

 

0.269

 

0.309

 

0.254

 

0.295

1

CAD

 

0.755

 

0.759

 

0.722

 

0.778

1

CNY

 

0.148

 

0.146

 

0.143

 

0.150

1

EUR

 

1.155

 

1.112

 

1.127

 

1.170

1

GBP

 

1.306

 

1.268

 

1.260

 

1.319

1

HKD

 

0.125

 

0.126

 

0.126

 

0.125

1

INR

 

0.014

 

0.015

 

0.014

 

0.015

1

MXN

 

0.051

 

0.052

 

0.050

 

0.050

1

MYR

 

0.243

 

0.229

 

0.238

 

0.241

1

NZD

 

0.677

 

0.700

 

0.661

 

0.695

1

RON

 

0.248

 

0.251

 

0.242

 

0.251

1

SGD

 

0.725

 

0.713

 

0.723

 

0.730

1

TRY

 

0.208

 

0.270

 

0.186

 

0.257

1

USD

 

0.979

 

0.985

 

0.984

 

0.976

100

CZK

 

4.504

 

4.227

 

4.381

 

4.583

100

DKK

 

15.496

 

14.944

 

15.091

 

15.718

100

JPY

 

0.886

 

0.878

 

0.895

 

0.867

100

KRW

 

0.089

 

0.087

 

0.088

 

0.092

100

NOK

 

12.036

 

11.920

 

11.328

 

11.892

100

PLN

 

27.111

 

26.122

 

26.198

 

28.015

100

SEK

 

11.264

 

11.537

 

10.989

 

11.888

100

THB

 

3.027

 

2.903

 

3.041

 

2.991

100

TWD

 

3.245

 

3.236

 

3.217

 

3.293

The table below shows the contract values and market values of the foreign exchange contracts (net) as of the balance sheet date:

CHF million

 

Fair value hedges

 

Cash flow hedges

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Net value

 

394

 

68

 

462

 

472

Market value 1

 

2

 

–1

 

1

 

2

Contract value

 

396

 

67

 

463

 

474

Corresponds to the carrying amount recognized as marketable securities or other liabilities.

Owing to its international activities, GF is exposed to currency risks. These financial risks occur in connection with transactions (in particular the purchase and sale of goods) which are effected in currencies different from the functional currency of the company in question. Such transactions are effected mainly in euros and US dollars. Currency risks can be reduced by purchasing and producing goods in the functional currency (“congruency” rule). In some cases, the remaining currency risks are hedged, generally for a maximum of twelve months, by means of forward exchange contracts.

The fair value hedges include foreign exchange contracts that serve to hedge loans to GF Corporate Companies in foreign currencies. Unrealized gains and losses from changes to the fair value are reported for these contracts in the financial result. The fair value hedges also include foreign exchange contracts that serve to hedge currency risks on receivables and liabilities. Like the currency effects on the underlying balance sheet item, gains and losses from changes to the fair value of these contracts are recognized in “Other operating income”.

The cash flow hedges mainly serve to hedge currency risks on future sales in foreign currencies. The volume of the foreign exchange contracts is limited to a maximum 75% of the expected sales. This results in a fully effective hedge. In individual cases, a higher ratio of the cash flows is hedged, e.g. for certain orders. Unrealized gains and losses from changes to the fair value are recognized directly in equity. They are transferred to the income statement when the service is performed and invoiced; as a result, the foreign exchange contracts become fair value hedges. To a lesser extent, currency risks with respect to future inventory purchases were also hedged during the reporting period.

The fair value hedges cover not only US dollar contracts but also contracts for the euro, the Turkish lira, the British pound, and the other currencies. All open foreign exchange contracts fall due and have an effect on liquidity and the income statement within twelve months of the balance sheet date. Assuming unchanged exchange rates, a cash outflow of CHF 462 million (gross) would be offset by a cash inflow of CHF 463 million (gross), giving a positive market value of CHF 1 million. Cash flow hedges account for cash outflows of CHF 68 million (gross) and cash inflows of CHF 67 million (gross).

Contract values, net by currencies

CHF million

 

2018

 

2017

 

 

 

 

 

USD/CHF

 

360

 

330

EUR/CHF

 

27

 

81

TRY/USD

 

13

 

10

GBP/EUR

 

4

 

10

CNY/USD

 

 

9

USD/SEK

 

9

 

7

SEK/CHF

 

7

 

7

GBP/CHF

 

4

 

7

JPY/CHF

 

7

 

6

SGD/CHF

 

8

 

4

EUR/TRY

 

5

 

Other

 

19

 

3

Total

 

463

 

474

Accounting principles

Derivative financial instruments used to hedge such balance sheet items are stated at fair value. In hedging contractually agreed future cash flows (hedge accounting), the effective portion of changes in the derivative financial instruments’ fair value is recognized in equity with no effect on the income statement. Any ineffective portion is recognized immediately in the income statement. As soon as an asset or liability results from the hedged underlying transaction, the gains and losses previously recognized in equity are derecognized and transferred to the income statement along with the valuation effect from the hedged underlying transaction.

Interest rate risk

The interest rate risk may involve either changes in future interest payments owing to fluctuations in market interest rates or the risk of a change in market value, i.e. the risk that the market value of a financial instrument will change owing to fluctuations in market interest rates.

Market value sensitivity analysis for interest-bearing financial instruments with a fixed interest rate: Market value fluctuations of fixed-interest financial instruments are not recognized in the Corporation’s income statement. Therefore, a change in interest rates would not have any effect on the income statement. Hedge accounting was not applied for interest rate hedging.

Cash flow sensitivity analysis for financial instruments with variable interest rates: a one-percentage-point increase in interest rates would have increased net income by CHF 4.2 million (previous year: CHF 5.0 million). A reduction in the interest rate by the same percentage would have reduced net income by the same amount. The underlying assumption for this analysis is that all other variables remain unchanged.

Price risk

The securities held for trading in the amount of CHF 6 million are exposed to price risks (on the stock market). Since the value of the securities held for trading is modest, there is no great sensitivity to changes in share prices. The securities held are mainly shares in Swiss blue chip companies.

Liquidity risk

The following table shows the contractual maturities (including interest rates) of the financial liabilities held by GF:

CHF million

 

Carrying amount

 

Contractual cash flows

 

Up to 1 year

 

1 to 5 years

 

More than 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

 

498

 

498

 

498

 

 

 

 

Bonds

 

574

 

631

 

8

 

181

 

442

Other financial liabilities

 

202

 

227

 

155

 

72

 

Accrued liabilities and deferred income

 

253

 

253

 

253

 

 

 

 

Other liabilities current/non-current 1

 

95

 

95

 

56

 

35

 

4

Total

 

1’622

 

1’704

 

970

 

288

 

446

1 For more details, see note 2.3 (2.3.1 Other liabilities).

The liquidity risk is the risk that GF is unable to meet its obligations when they fall due.

Liquidity is constantly monitored to ensure that it remains adequate. Liquidity reserves are held in order to offset the usual fluctuations in liquidity requirements. At the same time, the Corporation has unused credit lines in case more serious fluctuations occur. The total amount of unused credit lines as of 31 December 2018 was CHF 591 million (previous year: CHF 577 million). The credit lines are spread over several banks so that there is no excessive dependence on any one institution.