Emerging Risk
Emerging Risk 1: Adverse outcomes of AI technologies
Becoming a cornerstone of modern business practices from a futuristic concept, artificial intelligence has fundamentally altered how companies operate and compete. With its unprecedented ability to process and analyze vast amounts of data at an incredible speed, artificial intelligence enables companies to make more informed decisions, identify trends, and predict consumer behavior with exceptional accuracy.
At Garanti BBVA, we have models established with various algorithms ranging from machine learning to deep learning in areas such as marketing and sales, pricing, fraud detection, credit assessment, and customer satisfaction. However, starting from 2023, generative artificial intelligence technology has begun to have a more significant role in our lives. Beyond analyzing existing data, artificial intelligence that can generate new data and create original content now allows us to provide higher quality services to a broader customer base. In this context, our goal is to integrate generative artificial intelligence into our mobile application's chatbot, turning it into a personal assistant that understands our customers' needs and guides them with proactive recommendations.
Artificial intelligence technologies are no longer just an advantage but a necessity to remain competitive in the business world. Therefore, at Garanti BBVA, we believe that investing in artificial intelligence technologies is not only a move towards the future but also a fundamental element of achieving success in today's business world. However, we also recognize that issues such as intellectual property, copyright, and the potential risks associated with applying artificial intelligence to robotics (as 40% of global GDP is generated by human labor) are among the concerns that need to be addressed in the coming years.
As stated in an article published by the World Economic Forum in 2024, in addition to all the positive effects provided by AI, adverse outcomes of AI technologies are also defined as one of the three biggest emerging risks. When the risks that may occur with artificial intelligence are evaluated, the security of personal data, the security of companies internal and confidential data, the spread of false information, mass loss of jobs, and the use of artificial intelligence as a tool for cyber-attacks are seen as the primary risks. Considering that the impact and usage area of artificial intelligence will expand further in the long term, the relevant risks will be even more critical for companies in the long term. Since the risks originate from outside of companies, they are defined as external risks. Here is how the risks could occur for Garanti BBVA
Operational Risk: Operational risk is defined as the probability of loss resulting from human error, inadequate or failed internal processes, improper communication with respect to customers, markets or organizations, failures, interruptions or faults in systems or communication, improper data management, and external events including regulatory risk, cyber-attacks, external fraud, natural disasters and faulty services rendered by suppliers. Operational risk is managed based on the three lines of defense approach. AI is a relatively new concept. Therefore, the usage and knowledge level of the employees is not yet at the desired level. Risks may arise due to employee error. We train our employees on the use of AI to prevention. At the same time, disruptions in bank services may occur due to malfunctions in AI-based systems. The bank's business continuity team and technology teams take the necessary mitigation actions to prevent such disruptions.
Reputational Risk: Disruptions in AI-based services may damage the brand image of the bank. Customer satisfaction is one of the top priorities for the bank. That's why Net promoter Scores (NPS) are monitored regularly. When an undesirable trend is observed in the scores or there is a customer complaint, related actions are taken quickly.
Environmental and Social Risk: AI is a tool that can be used in ESG management. Globally, AI can be used in many areas such as management of Big Data, scenario analysis, processing of publicly available enterprise client data. However, errors that occur during data processing due to external reasons may negatively affect the bank's ESG strategy. To prevent this, it is important to use reliable AI-based systems.
Risk in Affiliates: As a financial institution, Garanti BBVA has subsidiaries in areas such as factoring, asset management, leasing, pension and fleet. AI can also be a tool for these subsidiaries. Operational and reputational risks may arise from the use of AI in these subsidiaries. The Bank closely monitors risk management activities carried out at affiliates with a holistic risk management perspective, in conformity with the international best practice norms in risk management, and in alignment with each company’s own risks, operations and arrangements. The Bank determines the needs for risk management of affiliates and ensures that required studies and reports commensurate with the structure, complexity, size and risks of the related affiliate are effectively managed in coordination with risk management units/functions in affiliates.
Being aware of all risks arising from AI, Garanti BBVA carries out effective risk management, especially in its governance structure. Personal data of bank customers are protected in accordance with local legal regulations. This issue is also handled sensitively in the processes of using AI. In addition to personal data, bank confidential data is also protected by the bank's risk governance structure. Data-based and artificial intelligence-supported decision-making processes regarding external fraud incidents are carried out to minimize possible the bank’s data and customer losses. Decision-making processes were developed by strengthening artificial intelligence and machine learning capability with 4 different analytical models.
Responsible AI principles are adopted when developing solutions on Big Data and Artificial Intelligence. Garanti BBVA pledges to be committed to Human Rights and not to discriminate, as stipulated also in the Garanti BBVA Code of Conduct. None of the analytical solutions employed in customer acquisition, pricing, recruitment and remuneration uses data pertaining to gender, color, ethnicity, disability, religion, sexual orientation or political affiliation. Garanti BBVA plans to operate new control mechanisms in artificial intelligence projects to generate unprejudiced and unbiased results. In addition to all these approaches, the following principles are espoused for Generative Artificial Intelligence:
- Guarantee the accuracy of outputs, avoid producing outputs that entail partiality and are harmful to individuals,
- Position Artificial Intelligence as an assistant to people to maintain individuals’ trust and present transparent information,
- Act in line with ethical, legal and social norms during work,
- Pay attention to confidentiality, security, privacy and intellectual property rights specific to the data used,
- Maintain a focus on reducing carbon footprint during the design, development and production of large language models
It is predicted that AI will also cause mass loss of jobs. As the business approach in the bank can be changed in the future, the job descriptions and expectations of some positions may change. This is a risk for Garanti BBVA, as well as a risk for the global banking industry and Garanti BBVA's customers. The bank, which has inclusive growth as one of the main pillars of its sustainability strategy, raises the awareness of its employees on this issue and trains its employees on data and technologies, especially AI. At the same time, it takes awareness-raising actions to increase awareness on the customer side. In addition, BBVA, the main shareholder of Garanti BBVA, steps up its plans in artificial intelligence by signing an agreement with OpenAI in 2024.
For Garanti BBVA, NPS is one of the main metrics that measure customer satisfaction. Management of customer-related risks in AI is directly related to the NPS score, as the failure to manage AI-related risks well and customers' concerns about protecting their personal data will directly affect NPS scores. The Bank NPS scores in 2022 SMEs NPS 1st rank, Commercial NPS 1st rank and retail NPS 2nd rank among private peers. The Bank NPS scores in 2023 Corporate NPS 1st rank, Commercial NPS 1st rank and retail NPS 2nd rank among private peers. The bank regularly monitor its NPS scores and shares them publicly. Garanti BBVA’s consistent performance in customer experience rely on four key competencies that it embraced in the execution of its strategy: Customer Understanding Capacity, Design Philosophy adopted, Empathetic Culture espoused by each member of the organization and advanced Measurement Systems allowing constant self-control. The bank also provides internal or external training to its employees to minimize risks in the use of new technologies such as AI. Details such as what are the legal requirements in the use of new technologies, what kind of governance structures have been developed in the bank to protect data, what action plan should be implemented in case of a possible case, how the issue should be handled to keep customer satisfaction high, are conveyed to employees during training.
Emerging Risk 2-Transition risk to a low carbon economy
Climate Change is one of the most important risks for banks. Climate change also creates additional emerging risks. When the global risks reports published annually by the World Economic Forum are examined, striking results are seen. WEF reported that 6 of the 10 top priority risks with a 10-year term in 2023 report and 5 in 2024 report were environmentally based. These risks, when examined, appear to be directly and indirectly caused by climate change. To minimize these risks, low carbon economy models are needed. In this case, the need for transition financing arises for the transition. Today, transition risk to a low carbon economy is an emerging risk for financial institutions and we foresee that this risk will continue in the short term. Therefore, transition risk to a low carbon economy is an emerging risk for Garanti BBVA. We predict that we will face its impact in the future. In another report of WEF, it is emphasized that if the transition process is not achieved, every 1oC increase will cause a 12% decrease in world GDP. In this case, transition risk to a low carbon economy is an economic risk for financial institutions. The transition process will affect many sectors and companies, and companies' products, services, raw materials and markets will be affected in the short and/or medium term. This may cause decreasing in companies' profits. A company whose financial balance goes negative will have difficulty in repaying its loans to banks. Since this risk is on the customer's side, it is an external risk for banks. As is the case on a global scale, there is a lack of awareness for the low carbon economy transition in companies in Turkey. According to an analysis made by the World Bank specifically for Turkey, Turkey needs a total of 165 billion dollars of transition financing by 2040 to achieve its net-zero target. In order to minimize these risks on the customer side, Garanti BBVA provides consultancy to its customers on ESG issues and directs them to take action for the transformation process. Thus, it aims to minimize the economic impact of transition risk.
Garanti BBVA analyzes high transition risk of its commercial customers. According to our High Transition Risk (HTR) reports, we see that 16% of our commercial portfolio is at transition risk in 22 sectors that could face transition risk. As a commercial bank, Garanti BBVA serves many commercial customers in the corporate, enterprise and SME segments. Some of our customers are lack of awareness for low carbon economy transition due to different reasons, especially in the SMEs segment. Therefore, most of our customers are exposed to transition risk. Our customers who cannot achieve transition may face profit loss in the short and/or medium term. In this case, it may cause instability in the repayment of the loans given. When we examine transition risks to a low carbon economy with our risk methods;
Credit Risk: In case of a possible lack of transition action, customer profitability may decrease and there may be instability in repaying the loan given by the bank. This creates an economic risk arising from credit risk.
Market Risk: Garanti BBVA receives all of its syndicated loans linked 100% sustainability KPIs. Lack of transition actions on the customer side negatively affects the bank's KPIs in syndicated loans. It also negatively affects the sustainability-related KPIs in the bank's own debt instruments.
Reputational risk: Sustainability is a strategic priority for Garanti BBVA and combating climate change is one of the main focus area for the bank. The lack of appetite on the customers side regarding transition financing may negatively affect the bank's goals and commitments. This may have negative impact on the brand image.
Environmental and Social Risk: Lack of investment appetite on the customers side in line with the existing targets for transition financing may affect the bank's environmental and social targets.
Risk in Affiliates: There are initiatives that work on transition financing on a global scale, especially in asset management. Lack of agile actions regarding transition financing of the bank's asset management subsidiary may cause some risks.
The Bank applies various approaches to mitigate transition risk to a low carbon economy. The primary action taken in this regard is to raise awareness on the customer side. Like a consultant, the necessity of transitional investments and the negative effects it may cause in the future are explained to the customers. Customers who stand out in the bank's High Transition Risk (HTR) report are prioritized. Make a positive impact and decarbonization are two important pillars of the bank's sustainability strategy. The bank has sustainable finance target as 400 billion TRY between 2018-2025 for sustainable financing. This goal also covers transition finance. The sustainable finance target has been added to the bonus remuneration metrics of all employees of the bank. Thus, this target is followed for board of directors, executive managers, business unit managers and all bank employees. The remuneration target allows transition finance volumes to increase. In the field of sustainable finance, the Bank provided 120 billion TRY of sustainable financing from 2018 to the end of 2023. At the same time, the bank increases the awareness level of companies on transition financing by collaborating with many external parties (NGOs, policy makers, etc.). Particularly, events are organized with TÜSİAD, one of Turkey's largest industrialists' associations, to mobilize transition financing. In 2022, the bank has started an event series called Sustainable Future in Export. Accordingly, we visit to cities that are prominent in exports and raise awareness of customers about sustainable transformation and transition financing. Thus, economic risks arising from transition risk on the customer side are mitigated. So far, 5 events have been organized in Istanbul, Gaziantep, Izmir, Bursa and Adana. Considering their export figures, these cities are the leading cities in Turkey. The Sustainable Future in Export event series will continue in other cities in 2024 and 2025. The bank regularly monitors the physical and transition risks in its portfolio and takes actions to minimize these risks. With the Transition Risk Indicator method, it evaluates its customers in carbon-intensive sectors with high transition risk and rate each of them. The bank communicates one-by-one with customers and their top manager that deems risky regarding the transition and suggests developing transition plans. During financing processes, it evaluates whether the transition plan is robust and adds it to the evaluation as a criterion for financing. The bank has a separate technical team on sustainable financing and customers are reached through this team. The employees of this team, who mostly have an engineering background, are experienced in evaluating customer demands, expectations and production processes. Transition financing issues are discussed in the bank's Sustainability and Responsible Banking Committee. All executive managers are member of the committee. The CEO, is also a member of the board of directors, is a member of the committee as well. In the committees, actions are taken regarding transition risk management with the comments and guidances of the bank's senior management. Sustainability criteria including transition finance issues are part of the loan request evaluation processes; thus, credit risk is mitigated. In order to transform their customers, business line and bank sustainability teams encourage customers and increase their awareness, thus minimizing market risk. During financial relations with customers, the bank's Environmental and Social Loan Standard is taken into account so that environmental and social risks are managed and minimized. Finally, with the bank's integrated risk perspective, bank risk teams carry out risk management, including subsidiaries. In this way, risks that may arise on the part of subsidiaries are tried to be prevented.