FIRST ENERGY BANK B.S.C. (c)162.255.163.56/~firstenergybank/wp-content/uploads/... · adequacy ratio. The revised framework segregates the capital components into common equity tier

FIRST ENERGY BANK B.S.C. (c)

RISK AND CAPITAL MANAGEMENT DISCLOSURES

FOR THE PERIOD ENDED 30 JUNE 2015

Table of Contents 1 Executive summary ....................................................................................................................... 4

2 Introduction ................................................................................................................................. 4

2.1 Pillar I ..................................................................................................................................................... 5

2.2 Pillar II .................................................................................................................................................... 5

2.3 Pillar III ................................................................................................................................................... 6

3 Overall risk management .............................................................................................................. 6

3.1 Risk management strategy .................................................................................................................... 6

3.2 Risk management framework ............................................................................................................... 6

3.3 Risk types ............................................................................................................................................... 7

4 Capital structure, capital management and capital adequacy ......................................................... 7

4.1 Capital and group structure ................................................................................................................... 8

4.2 Capital management ............................................................................................................................. 8

4.2.1 Regulatory capital requirement and capital adequacy ..................................................................... 8

4.2.1.1 Regulatory capital structure .............................................................................................................. 9

4.2.2 Internal capital adequacy assessment process ................................................................................. 9

4.3 Exposures exceeding 15% of the capital base ..................................................................................... 10

4.4 Financial performance and position .................................................................................................... 10

5 Credit and investment risk ...........................................................................................................10

5.1 Credit and investment risk management ............................................................................................ 10

5.2 Capital requirements for credit and investment risk .......................................................................... 13

5.2.1 Credit and investment exposures and risk-weighted assets ............................................................. 15

5.2.2 Capital requirements by type of Islamic financing contract ............................................................ 16

5.2.3 Gross funded and unfunded exposure ............................................................................................ 16

5.2.4 Equity investments held in the banking book ................................................................................. 17

5.3 Concentration of credit risk ................................................................................................................. 17

5.3.1 Industry and sector-wise distribution as at 30 June 2015: .............................................................. 18

5.3.2 Geographic distribution as at 30 June 2015: ................................................................................... 19

5.3.3 Credit risk mitigation ....................................................................................................................... 19

5.4 Counterparty credit risk ...................................................................................................................... 20

5.5 Settlement risk .................................................................................................................................... 20

5.6 Earnings prohibited by Sharia’a ........................................................................................................... 21

5.7 Transactions with related parties ........................................................................................................ 21

6 Market risk ..................................................................................................................................22

6.1 Capital requirements for market risk .................................................................................................. 22

6.2 Foreign currency translation risk ......................................................................................................... 22

7 Operational risk ...........................................................................................................................23

7.1 Operational risk management ............................................................................................................. 23

7.2 Legal compliance and litigation ........................................................................................................... 23

7.3 Sharia’a compliance ............................................................................................................................. 23

7.4 Capital requirements for operational risk ........................................................................................... 24

8 Liquidity risk ................................................................................................................................24

8.1 Maturity profile ................................................................................................................................... 25

9 Profit rate risk in the banking book ..............................................................................................26

10 Reputational risk .........................................................................................................................28

11 Strategic risk................................................................................................................................28

12 Other risks ...................................................................................................................................28

13 Regulatory Compliance ................................................................................................................28

14 Basel III Ratios .............................................................................................................................29

First Energy Bank BSC (c)

Risk and Capital Management Disclosures

For the period ended 30 June 2015

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1 Executive summary

First Energy Bank B.S.C. (c) (the "Bank") is a closed shareholding company incorporated in the

Kingdom of Bahrain on 23 June, 2008, under Commercial Registration No. 69089. The Bank operates

under Islamic Wholesale Banks license issued by the Central Bank of Bahrain (the "CBB"). The Bank's

registered office is at Building 1459, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank and its subsidiaries (the "Group") include Sharia’a compliant

investment advisory services, participation in project development, joint ventures, mergers and

acquisitions and the purchase of assets and asset portfolios related to the energy sector. The Bank is

regulated by the CBB and supervised by a Sharia’a Supervisory Board for compliance with the

Sharia’a rules and principles.

In 2012, the Bank hired an external independent consultant to conduct a review of its Risk

Management Framework benchmarked against ISO 31000:2009 Risk Management Principles and

Guidelines. The outcome of the review was that the Bank is in compliance with the said principles and

guidelines.

The CBB Basel II guidelines became effective on 1 January 2008 as the common framework for the

implementation of Basel II capital adequacy framework for Banks incorporated in the Kingdom of

Bahrain. The disclosures in this report have been prepared in accordance with the CBB requirements

outlined in the Public Disclosure Module (“PD”), CBB Rule Book - Volume II for Islamic Banks. The

requirements of the section follow the requirements of Basel II - Pillar III and the Islamic Financial

Services Board’s (IFSB) recommended disclosures for Islamic banks.

This report only contains qualitative and quantitative information on risk components and capital

adequacy. The qualitative and quantitative disclosures relating to corporate governance and

remuneration are disclosed on an annual basis in the Bank’s annual report.

These disclosures should be read in conjunction with the Bank’s annual report for the year ended

31 December 2014 and the condensed consolidated interim financial information for the six months

period ended 30 June 2015.

2 Introduction

Basel II based framework provides a more risk sensitive approach for the assessment of risk and the

calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The

framework intends to strengthen the risk management practices and processes within financial

institutions. The Bank has accordingly taken steps to comply with these requirements.

The CBB’s capital management framework, consistent with the Basel II accord, is built on three

pillars:

• Pillar I: calculation of the risk weighted amounts and regulatory capital requirement.

• Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment

Process.

• Pillar III: rules for the disclosure of risk management and capital adequacy information.




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2.1 Pillar I

Pillar I prescribes the basis for the calculation of the regulatory capital adequacy ratio. It defines the

regulatory minimum capital requirements for each bank to cover credit risk, market risk and

operational risk inherent in its business model. It also defines the methodology for measurement of

these risks and the various elements of qualifying capital. The capital adequacy ratio is calculated by

dividing the regulatory capital base by the total Risk Weighted Assets (RWAs).

The resultant ratio is to be maintained above a predetermined and communicated level. As required by

the CBB, the minimum capital adequacy ratio for banks incorporated in Bahrain is 12% compared to

the Basel Committee’s minimum recommended ratio of 8%. The CBB also requires banks incorporated

in Bahrain to maintain a buffer of 0.5% above the minimum capital adequacy ratio. In the event that the

capital adequacy ratio falls below 12.5%, additional prudential reporting requirements apply, and a

formal action plan setting out the measures to be taken to restore the ratio above the target level is to be

formulated and submitted to the CBB. Consequently, the CBB requires the Bank to maintain an

effective minimum capital adequacy ratio of 12.5%.

Effective from 1 January 2015 CBB has introduced Basel III framework for calculation of capital

adequacy ratio. The revised framework segregates the capital components into common equity tier 1

(CET 1), additional tier 1 (AT 1) and Tier 2 (T 2). The minimum ratio required to be maintained by the

Banks under the revised framework: on a consolidated basis is 12.5% (which comprise CET 1 - 6.5%,

AT 1 - 1.5%, T 2 - 2%, and capital conservation buffer of 2.5%) and on a solo basis is 8% (which

comprise CET 1 - 4.5%, AT 1 - 1.5%, and T 2 - 2%).

Under the CBB’s Basel II capital adequacy framework, the RWAs are calculated by multiplying book

values of the assets by standard weights (prescribed by the CBB) for each risk category (as per

External Credit Assessment Institutions) within each asset category.

The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the

RWAs in accordance with the CBB’s Basel II capital adequacy framework.

Risk Type Approach used by the Bank

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar II

Pillar II deals with the Supervisory Review and Evaluation Process (SREP). It also recommends banks

to establish the Internal Capital Adequacy Assessment Process (ICAAP) for assessing the adequacy of

the available capital to cover all material risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB for

prescribing the bank-specific minimum capital adequacy ratio. Pending finalization of the assessment

process, all banks incorporated in Bahrain are required to continue to maintain the existing 12% and

8% minimum capital adequacy ratios on consolidated basis and solo basis respectively.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to

which the Bank is exposed. The ICAAP framework was approved by the Board. The ICAAP

framework includes identification, assessment, measurement, monitoring and reporting of all material




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risks and maintaining appropriate level of capital in line with the Bank’s overall risk profile and

business plan. The ICAAP is also supplemented by developing stress scenarios and assessing the

impact of such scenarios on the portfolios, risk profile, capital adequacy of the Bank and ensuring the

adequacy of capital in such instances.

2.3 Pillar III

Pillar III of the CBB’s Basel II framework prescribes the coverage, depth, timelines and medium of

communicating the information by the institution on its governance structure, risk profile, risk

management framework and the capital adequacy position. The disclosures comprise detailed

qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to

complement the first two Pillars and enabling stakeholders and market participants in getting an insight

in the institution’s risk appetite and risk exposures and enable detailed assessment and comparability

between different banks.

3 Overall risk management

3.1 Risk management strategy

The Bank perceives good risk management capabilities to be the foundation for delivering superior

results on a risk-adjusted basis to customers, investors and shareholders. The Bank will continue to

adopt international best practices of risk management, superior corporate governance and the highest

level of market discipline.

The primary objectives of the risk management strategy of the Bank are to:

• Manage risks inherent in the Bank’s activities in line with the risk appetite of the Bank;

• Strengthen the Bank’s risk management practices to reflect industry best practices; and

• Align internal capital requirements with risk materiality.

The risk appetite is articulated through the limit structures for individual risks. These limits are based

on the Bank’s business plans and guided by the regulatory requirements and guidelines. By defining

the risk appetite, the Bank links its individual risks to its strategy. The risk appetite defines the level of

risk that the Bank is prepared to take in order to achieve its objectives. The Bank reviews and realigns

its risk appetite as per the evolving business plan of the Bank with changing economic and market

scenarios. The Bank also assesses its tolerance for specific risk categories and its strategy to manage

these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards

accepting or rejecting these risks. Tolerance levels are reflected in the limits defined by the Bank for

each risk area.

3.2 Risk management framework

The Bank’s Board of Directors through its Audit and Risk Committee (a subcommittee of the Board of

Directors) has the responsibility for ensuring the establishment and effective implementation of an

integrated risk management framework for the Bank. Further, the Risk Management Department

(RMD) is empowered to independently identify and assess risks that may arise from the Bank’s

investing, financing and operating activities; as well as recommend directly to the Management Risk

Committee (MRC) any prevention and mitigation measures as it deems fit. In addition, the Internal

Audit function, which is independent of both operations and the Bank’s investments units, reviews the

risk management process.




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3.3 Risk types

As an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to

various risks in the normal course of its business and these risks include:

a. Credit and investment risk including concentration risk, counterparty credit risk and settlement

risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Other risks

The details on exposure of the Bank to these risks and the management framework for them are

discussed in the following sections 5-13 of this document.

4 Capital structure, capital management and capital adequacy

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB

during the period ended 30 June 2015.

The Bank’s Tier 1 and total capital adequacy ratios comply with the minimum capital requirements

under the CBB’s Basel III framework.

Amounts disclosed in the tables related to the calculation of the capital adequacy ratio in line with the

Prudential Information Report (PIR) comprise only the Bank and MENAdrill Investment Company

excluding all other subsidiaries which are commercial entities.

The Bank’s total risk weighted exposures as at 30 June 2015 amounted to USD 3,106,162 thousand.

Credit risk accounted for 92.61%, operational risk 5.18%, and market risk 2.21% of the total risk

weighted assets. Total regulatory capital was USD 957,290 thousand.

As at 30 June 2015, Bank’s total capital adequacy ratio was 30.82%.




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4.1 Capital and group structure

The authorized share capital of the Bank is 2 billion shares of USD 1 each. The paid up capital of the

Bank is USD 1 billion divided into 1 billion shares of USD 1 each.

The table below shows the treatment by the Bank of its subsidiaries for capital computation purposes.

* Based on instructions from the CBB vide letter dated 5 June 2012.

4.2 Capital management

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements

imposed by the regulator (CBB), so as to maintain investor, creditor and market confidence and to

sustain future development of the business. The impact of the level of capital on shareholders’ return is

also recognised and the Bank recognises the need to maintain a balance between the returns and

security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory

requirements. The Bank’s capital management policy seeks to optimize returns within the internally

defined risk tolerances while satisfying all the regulatory requirements.

The Bank ensures that the regulatory capital adequacy requirements are met and complied with at all

times.

4.2.1 Regulatory capital requirement and capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the

Bank to maintain the ratio of total capital base to the total risk weighted assets at a minimum of 12.5%.

Entity name %age of

holding

Country of

incorporation

Entity

classification

as per CA

Module

Treatment

for

accounting

purposes

Treatment for

regulatory

purposes

Al Dur Energy

Investment

Company (ADEIC)

58.83% Cayman Islands Commercial

entity Consolidated Risk weighted

North Africa

Investment

Company

100% Kingdom of

Bahrain

Commercial


Menadrill

Investment

Company

59.44% Cayman Islands Commercial

entity Consolidated

Fully

consolidated * /

Risk weighted

First Energy Oman 100% Cayman Islands Commercial


FEB-NOVUS

Aircraft Holding

Company

98.50% Commonwealth

of the Bahamas

Commercial





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The Bank does not have banking and financial institution subsidiaries or interest in insurance entities.

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB

during the period ended 30 June 2015.

The following table summarises the regulatory capital requirements for credit risk, market risk and

operational risk as at 30 June 2015:

USD 000’s

Risk weighted exposure Risk weighted

exposure

% of Total risk

weighted assets

Credit & Investment risk 2,876,695 92.61%

Market risk 68,639 2.21%

Operational risk 160,828 5.18%

Total 3,106,162 100.00%

4.2.1.1 Regulatory capital structure

The following table summarises the total capital after deductions for Capital Adequacy Ratio (CAR)

calculation as of 30 June 2015:

USD 000’s

CET 1 AT 1 T 2 Total

Share capital 1,000,000 - - 1,000,000

Statutory reserve 9,736 - - 9,736

Retained earnings (12,469) - - (12,469)

Current interim profit / (loss) (42,473) - (42,473)

Collective impairment loss

provision - - 2,496 2,496

Total capital base 954,794 - 2,496 957,290

The Bank has not included the non-controlling interest in MENAdrill Investment Company in its Tier 1

capital in line with the CBB instructions vide letter dated 8 May 2011.

4.2.2 Internal capital adequacy assessment process

In line with the guidelines provided under the Pillar II of the Basel II Accord, the Bank has established

the ICAAP to augment the regulatory capital adequacy. The ICAAP considers the adequacy of capital

with respect to the internal capital adequacy ratio target and includes other material risks apart from

those prescribed under the regulatory Pillar I guidelines, stressed scenarios and growth in business

based on the business plan. The Bank segregates all material risks into measurable and non-measurable

risks and has established measurement methodologies for all material risks and quantifies the capital

requirement for them. Currently, the Bank maintains an additional capital buffer of 2% for the

non-measurable risks. As of 30 June 2015, the internal capital adequacy ratio was above the internal

target.




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4.3 Exposures exceeding materiality thresholds

The Bank is required to carry out capital adjustments (deduction) for its exposure to significant

investments in capital of banking and financial entities subject to certain materiality thresholds as

defined in the Capital Adequacy Module (“CA Module”) of the CBB Rule Book.

Further, the exposures in excess of limits prescribed by Credit Risk Management Module (“CM

Module”) (single obligor limit of 15% of total capital and aggregate limit for connected counterparty

exposure of 25% of total capital) are subject to risk weight of 800%.

The following table summarises the exposures exceeding regulatory limits as of 30 June 2015:

USD 000’s

Exposure type Total exposure

Exposure as %age to

total capital

Exposure in excess of

limit as per CM

Module

Equity and financing

exposure to its

subsidiaries and

associates 493,858 51.59% 254,536

4.4 Financial performance and position

The following table summarises the financial performance ratios as at 30 June:

Ratio 30 June

2015

30 June

2014

30 June

2013

30 June

2012

30 June

2011

Return on Average

Equity * -5.97% 3.39% 2.41% 2.20% 0.29%

Return on Average

Assets * -4.90% 2.84% 2.02% 1.85% 0.26%

Net income margin -841.13% 55.96% 52.41% 55.79% 22.18%

Operating cost to

Income 117.06% 11.94% 47.59% 39.27% 77.82%

* Ratios are based on half year profit

The Bank had no significant new investments during the period.

5 Credit and investment risk

5.1 Credit and investment risk management

The credit and investment risk exposures faced by the Bank are by way of its short term liquidity

related placements with other financial institutions, financing facilities provided to third parties and

associates, and in respect of investments in projects, sukuk, listed and unlisted equities. The investment

related funding exposures arise in the ordinary course of its investment banking activities and are

generally transacted without collateral or other credit risk mitigants, however the majority of such

investments are asset based.




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RMD is responsible for conducting independent risk review and analysis for all credit and investment

applications received from Investment Banking, Financing, Capital Markets and Treasury

Departments. It is also responsible for the ongoing review of the credit worthiness of existing clients

through the process of periodic credit reviews, annual or more frequently, if required. RMD is also

responsible for monitoring all approved limits, and reporting breaches, if any to the MRC, Board Audit

and Risk Committee and the Board as appropriate.

RMD reviews every Application received from the respective business initiator (LOB) and prepares an

independent comprehensive Risk Analysis with recommendations. The Application and the Risk

Analysis are submitted to the MRC for approval, if within their approval authority, or for review and

further submission to the appropriate approval authority.

Following approval and draw down, the credit exposures are monitored on an ongoing basis. These

include keeping track of counterparties’ compliance with credit terms, identifying early signs of

irregularity, conducting periodic valuation of collateral, if applicable, and monitoring timely

repayments. All the exposures are reviewed at least annually and interim reviews are conducted in case

of any adverse developments.

RMD assesses the creditworthiness of the counterparties using rating models as a part of the review for

new facilities as well as existing facilities undergoing the annual review process. The Bank has

implemented industry specific rating models based on key factors relevant to the industry. These

models are used to rate exposures to financial institutions and also for counterparties in various other

industries except in case of counterparties rated externally by at least two rating agencies recognised by

the CBB. The Bank rates the exposures on a scale of 1 to 10 mapped to the following categories; 1 is

mapped to Prime, 2 to High grade, 3 to Upper medium grade, 4 to Lower medium grade, 5 to

Non-investment grade speculative, 6 to Highly speculative, 7 to Substantial risk, 8 to Extremely

speculative, 9 to In default with little prospect of recovery and 10 to In default with no prospect of

recovery (Loss). The Bank is not engaged in providing retail credit facilities and hence it does not use

any retail credit “scoring” models.

The Bank maintains a strong focus on identification of signs of deterioration in the credit worthiness of

counterparties and performance of investments in order to take preventive measures before an existing

facility becomes substandard / doubtful or deteriorates in value.

RMD also monitors credit and investment risk exposures against established limits on a daily basis.

RMD alerts the concerned business line and the MRC whenever a limit is breached. RMD also

produces periodic exposure and risk reports for the Board as well as reports required for regulatory

reporting and public disclosure as required under the Pillar III guidelines.

The credit categorisation of the Bank including problem credit categories is aligned with the regulatory

categorisation. All credit exposures which are regular and performing (as the contract requires) and for

which there is no reason to suspect that the creditor's financial condition or collateral adequacy has

depreciated in any way will be categorised as Standard or Current.

There are three categories of problem credit exposure classification indicating increasing degrees of

potential risk of loss in addition to watch-listing. Substandard

An obligation or part of an obligation that is inadequately protracted by the current financial condition

of the obligor or the collateral pledged. The normal repayment of principal and profit or settlement at

maturity may be or has been jeopardised or collateral coverage is clearly deficient. No loss is foreseen

but a protracted work-out is a possibility.




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Substandard accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 90 days;

• Cash-flow is not sufficient to meet currently maturing financing facility;

• Accounts which carry more than a normal degree of risk due to the absence of updated or

satisfactory financial information or inadequate collateral documentation.

Doubtful

An obligation or part of an obligation where there is a high probability of some loss, the extent which

cannot be currently quantified.

Doubtful accounts may exhibit one or all of the following characteristics:

• Principal or profit repayment is past due for more than 180 days;

• Collection in full on the basis of currently existing facts, conditions and values is highly

questionable and improbable;

• Likelihood of loss is high but decision to classify as Loss has been deferred till an exact decision is

determined.

Loss

An obligation regarded as uncollectable and where loss and consequent write-off is imminent. Once

written off these amounts are no longer shown as exposure although eventual recovery may still be a

possibility. Loss accounts may exhibit one or both of the following characteristics:

• Principal or profit repayment is past due for more than a year;

• Immediate circumstances indicate that an asset is uncollectable.

The Bank regularly assesses its credit portfolio for any indicators of impairment on a periodic basis and

would consider provision for impairment on specific credit exposures. The Bank makes collective

impairment on its credit exposures. The Bank sets aside a general provision for potential losses that may occur as a result of currently

unidentifiable risks is relation to its exposures. Typically, the Bank will make a general provision for

performing exposures i.e. internal ratings 1 to 7 corresponding to CBB’s classification of Standard and

Watch list exposures, and for the portion of non-performing credit facilities not covered by specific

provisions. The amount of general provision is a percentage of the net book value of all exposures

taking into account certain exemptions.

Given that the nature of general provisions is systemic based on macro-economic factors that apply

across all exposures, it is necessary to adopt a range rather than a single number. In addition within

that range, the actual percentage shall be reviewed annually based on conditions prevailing on that

date. Consequently, the Bank will adopt a range that is not less than 1% and not more than 10% of

qualifying exposures. Within this range, every year as of the financial closing date, the Board, shall,

on the recommendation of the Board Audit and Risk Committee (BARC) adopt a specific level of

general provisions as of that date. Upon every anniversary, the level will be reviewed by MRC and

appropriate recommendations made to BARC and Board.

The total value of the collective provision was US$ 2,496 thousand as of 30 June 2015.




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The Bank shall write-off the exposures (fully / partially as the case may be) when there is reasonable

doubt over recovery of the amount. Reasonable doubt shall be based on objective evidence that the

balance is impaired and would not be recovered. The Bank defines its past due credits as any amount due to FEB and not received. Principal or profit

repayments that are past due for more than 90 days are classified as substandard. The Bank considers a Financing facility as impaired in case it observes certain objective evidence of

impairment which might include:

• The significant financial difficulty resulting in lack of ability of the borrower; • A breach of contract such as a default or delinquency in payment of profit or principal; • Lack of willingness or intent of the borrower; • The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to

the borrower a concession that the lender would not otherwise consider; • It becoming probable that the borrower will enter bankruptcy or other financial reorganization; • The disappearance of an active market because of financial difficulties; • Observable data indicating that there is a measurable decrease in the estimated future cash flows

from a group of financial assets since the initial recognition of those assets, although the decrease

cannot yet be identified with the individual financial assets in the group including: adverse changes

in the payment status of the borrowers, or national or local economic conditions that correlate with

defaults on the assets in the group.

During the period, the Bank has made additional specific provision of USD 20 million for its

investment in associate and USD 44 million impairment for its quoted equity investments.

The Bank did not have any exposure to highly leveraged and other high risk counterparties as at

30 June 2015. (As per the CBB Highly Leveraged Institutions (HLIs) are defined as having the

following characteristics; i- subject to little or no regulatory oversight; ii- generally subject to very

limited disclosure requirements and are not subject to rating by credit reference agencies; and iii- often

take on significant leverage, where leverage is the ratio between risk, expressed in some common

denominator, and capital). The Bank also did not have any renegotiated exposures as at

30 June 2015.

As on the reporting date, the Bank does not have any obligation with respect to recourse transaction

(i.e. where the asset has been sold, but the bank retains responsibility for repayment if the original

counterparty defaults or fails to fulfil obligations). The Bank has also not imposed any penalties on

customers for default during the period.

5.2 Capital requirements for credit and investment risk

The Bank uses the Standardised Approach under the Basel III framework for measuring the regulatory

capital requirement for its credit risk. The Bank utilizes ratings from External Credit Assessment

Institution (ECAI) recognised by the CBB (S&P, Moody’s, Fitch, and Capital Intelligence) for its

regulatory credit risk capital charge calculations.




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The table below analyses the Group's maximum credit exposure where the credit quality is reflected by

external credit ratings (S&P, Moody’s, Fitch and Capital Intelligence) of the counterparties where

relevant:

2015

Bank

balances

Placements

with

financial

institutions

Murabaha

financing

Investment

securities

Other

assets Total

Prime to High grade:

AAA – AA 930 34,007 - - - 34,937

Medium grade: A –

BBB 17,835 55,250 - 254,092 - 327,177

Non-investment /

speculative:

BB – B 1,058 - - 25,920 - 26,978

Unrated 685 17,787 34,481 35,880 31,981 120,814

20,508 107,044 34,481 315,892 31,981 509,906

Where external ratings of approved agencies are available, the ratings of these agencies will be mapped

to internal categories as follows:

External rating

agencies

Internal ratings

1 to 7- 8 9 10

S & P AAA to CCC- CC C D

Moody’s Aaa to Caa3 Ca C -

CI AAA to C- Regulatory

supervision (RS)

Selective default

(SD) D

Fitch AAA to CCC CC C Restricted default

or default




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5.2.1 Credit and investment exposures and risk-weighted assets

The following table summarises the components of credit risk as computed for regulatory capital

adequacy purposes, net of the relevant deductions as at 30 June 2015:

USD 000’s

Asset categories for credit risk Credit

exposures

Average risk

weights

Credit risk

weighted

assets

Capital

requirements

@ 12.5%

Cash items 12 0.00% - -

Total claims on sovereigns:

Sukuk –Bahrain and other GCC

94,911

0.00%

-

-

Total claims on banks:

Standard Risk Weights

Preferential Risk Weights

273,041

30,898

50.97%

20.00%

139,171

6,180

17,396

773

Claims on corporate 499,481 398.63% 1,991,096 248,887

Investment in securities:

Equity investments

245,123

238.82%

585,403

73,175

Holdings of real estate:

Land - Premises occupied by

the Bank

9,200

100.00% 9,200

1,150

Investment in listed real estate

companies

20,076

300.00% 60,229

7,529

Investment in unlisted real

estate companies 15,000 400.00% 60,000 7,500

Other assets 25,415 100.00% 25,415 3,177

Total

1,213,157 237.12% 2,876,694 359,587




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5.2.2 Capital requirements by type of Islamic financing contract

The following table summarises the components of credit risk by type of Islamic financing contract as

at 30 June 2015:

USD 000’s

Asset categories for credit

risk

Credit

exposures

(after

deduction)

Average risk

weights

Credit risk

weighted

assets

Capital

requirements@

12.5%

Murabaha financing 76,782 100.00% 76,782 9,598

Placements with financial

institutions:

- Commodity murabaha

- Wakala

82,725

24,319

32.84%

50.00%

27,170

12,159

3,396

1,520

Sukuk

- Mudaraba 90,597 50.00% 45,299 5,662

- Murabaha 18,035 27.93% 5,038 630

- Wakala 25,026 89.93% 22,506 2,813

- Ijarah 172,773 64.88% 112,098 14,012

- Al Salam 11,728 0.00% - -

Total 501,985 59.97% 301,052 37,631

5.2.3 Gross funded and unfunded exposure

The following table summarises the total gross credit exposure and average gross exposure over the

period ended 30 June 2015 broken down by major types of credit exposures into funded and unfunded:

USD 000’s

Asset categories Average

exposures* Gross exposure

Cash and bank balances 21,312 20,520

Placements with financial institutions 111,481 107,044

Murabaha financing 33,570 34,481

Ijarah assets 481,369 484,681

Investment securities 516,061 529,670

Equity accounted investees 103,981 94,016

Other assets 42,405 39,069

Property and equipment 10,288 10,389

Total funded exposures 1,320,467 1,319,870

Forward treasury commitments 2,006 -

Operating lease commitments 1,389 1,330

Total unfunded exposures 3,395 1,330

* Represents quarterly average balances for the period ended 30 June 2015.




17 | P a g e

5.2.4 Equity investments held in the banking book

All the equity investments of the Bank other than the investments in subsidiaries consolidated for

capital computation purposes are held in the banking book and are subject to credit risk weighting

under the capital adequacy framework.

The following table summarises the breakdown of the Bank’s equity investments by objectives and

market type as at 30 June 2015:

USD 000’s

Objective Type Gross

Exposure

Average risk

weight %

Risk weighted

Exposure

Capital

Requirement

@ 12.5%

Capital gain Unquoted 15,000 400% 60,000 7,500

Strategic Quoted 98,703 100% 98,703 12,338

Strategic * Unquoted 146,419 332% 486,700 60,838

* This includes investment in subsidiaries which are risk weighted for purposes of PIR and does not include equity

exposure of Menadrill Investment Co. of USD 109,759 thousand due to its consolidation for capital adequacy computation

purpose. The exposure to investment in subsidiaries which is in excess of limits prescribed by CM Module (single obligor

and aggregate limits) is risk weighted at 800%.

As at 30 June 2015 the Bank did not have realised and unrealised gains or losses on sale of investments

and on fair valuing of investments carried at fair value through equity, respectively.

The Bank does not have any exposure to equity based financing structure.

5.3 Concentration of credit risk

Concentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact

of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in

portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank adheres to the regulatory guidelines in respect of large exposures and connected and related

counterparty exposures to effectively manage the name concentration. Any excess above the said limit

has been reported to the CBB and treated in accordance with the regulatory guidelines in respect of

capital deduction for such exposures. In addition, the Bank has established internal limits on the

maximum permissible exposure to business lines / activities, sectors and countries for managing

concentration risk. The portfolio is segregated by business line / activities, geography and industry

segments. The activities are segregated as Treasury, Islamic Financing and Investments and the Bank

has internal limits for these activities. In addition to the business line limits, the Bank segregates all its

exposures by country, sets rating-based country limits and monitors the exposures with respect to these

limits. Additionally, the Bank has established HHI limits for Name, Country, and Sector

concentrations. RMD monitors adherence to the limits on an ongoing basis.




18 | P a g e

5.3.1 Industry and sector-wise distribution as at 30 June 2015:

The following table summarises the distribution of exposures by industry broken down by major types

of credit exposures as at 30 June 2015:

USD 000’s

Asset categories

Banks and

financial

institutions

Energy,

power and

infrastructure

Others Total

Cash and bank balances 20,520 - - 20,520


institutions 107,044 - - 107,044

Murabaha financing - 29,143 5,567 34,710

Less: Collective provision - (229) - (229)

Murabaha financing (net) - 28,914 5,567 34,481

Ijarah assets - 396,981 87,700 484,681

Investment securities (gross) 282,306 100,537 174,094 556,937

Less: Specific provision

Collective provision

-

(2,016)

-

-

(25,000)

(251)

(25,000)

(2,267)

Investment securities (net) 280,290 100,537 148,843 529,670

Equity accounted investees 44,058 58,993 10,965 114,016

Less: Specific provision - (20,000) - (20,000)

Equity accounted investees (net) 44,058 38,993 10,965 94,016

Other assets 80 32,520 6,469 39,069

Property and equipment (gross) - - 24,183 24,183

Less: Specific provision - - (13,794) (13,794)

Property and equipment (net) - - 10,389 10,389

Total funded exposures 451,992 597,945 269,933 1,319,870

Operating lease commitments - - 1,330 1,330

Total unfunded exposures - - 1,330 1,330




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5.3.2 Geographic distribution as at 30 June 2015:

The following table summarises the geographic distribution of exposures broken down into significant

areas by major type of credit exposures as at 30 June 2015:

The Group allocates exposures to a particular geographical area based on the risk domicile concept,

which could be either the location of the asset or the location of the counterparty.

5.3.3 Credit risk mitigation

The Bank uses a variety of techniques to mitigate credit risks to which it is exposed to. As a policy,

obtaining adequate mitigants will not be the reason for granting credit to counterparties lacking

creditworthiness. Only eligible collaterals as per the CBB guidelines and approved by the Bank’s

Sharia’a Supervisory Committee are considered for reducing the capital requirement though the Bank

can continue to take non-eligible collaterals to safeguard its exposure. The Bank has clear policies on

the type of assets that can be accepted as collateral security and the mode of valuation of these assets.

In general, all eligible collaterals are valued at least once a year.

Asset categories MENA Europe Americas Asia Total

Cash and bank balances 17,858 2,662 - - 20,520


institutions 73,037 34,007 - - 107,044

Murabaha financing 5,567 29,143 - - 34,710

Less: Collective provision - (229) - - (229)

Murabaha financing (net) 5,567 28,914 - - 34,481

Ijarah assets - - 396,981 87,700 484,681

Investment securities (gross) 490,667 26,264 - 40,006 556,937

Less: Specific provision (20,000) - - (5,000) (25,000)

Collective provision (1,923) (344) - - (2,267)

Investment securities (net) 468,744 25,920 - 35,006 529,670

Equity accounted investees 103,051 10,965 - - 114,016

Less: Specific provision (20,000) - - - (20,000)

Equity accounted investees (net) 83,051 10,965 - - 94,016

Other assets 17,459 2,498 17,237 1,875 39,069

Property and equipment (gross) 24,183 - - - 24,183

Less: Specific provision (13,794) - - - (13,794)

Property and equipment (net) 10,389 - - - 10,389

Total funded exposure 676,105 104,966 414,218 124,581 1,319,870

Operating lease commitments 1,330 - - - 1,330

Total unfunded exposures 1,330 - - - 1,330




20 | P a g e

The position of collateral cover for all credit exposures categorised on the basis of the type of security

as on 30 June 2015 is given in the table below:

* These listed securities are pledged with the Security Trustee as collateral for the Bank for the

murabaha financing facility extended. As a policy, the Bank applies 25% haircut for this type of

collateral plus 8% for foreign currency mismatch.

The Bank also uses on-balance sheet netting as a credit risk mitigant technique if:

(1) It has a well-founded legal basis for concluding that the netting or offsetting agreement is

enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or

bankrupt; (2) It is able at any time to determine those assets and liabilities with the same counterparty that are

subject to the netting agreement;

5.4 Counterparty credit risk

Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default before

the final settlement of the transaction’s cash flows. An economic loss would occur if the transaction or

portfolio of transactions with the counterparty has a positive economic value at the time of settlement

and the counterparty is in default. The Bank does not have positions in OTC derivatives, Securities

Financing Transactions (SFTs), Margin Lending Transactions or any other long settlement transactions

which would expose it to counterparty credit risk.

5.5 Settlement risk

Settlement risk is the risk that a counterparty does not deliver on its obligation or its value in cash as

per agreement when the trade was entered though the other counterparty or counterparties have already

delivered their obligation as agreed. The Bank is exposed to settlement risk occasionally on account of

the foreign exchange spot transaction entered into for business and operational requirements. The Bank

has established limit structure based on the credit quality (assessed based on credit rating) for

settlement exposures and the limits are monitored on an ongoing basis.

The Bank uses an IT enabled limit monitoring system for online monitoring of credit and settlement

limits of counterparties. The system assists in setting and monitoring of limits by tenor, facilities,

counterparties, group of related counterparties, products, sectors and countries. The system also enables

monitoring limit end dates and review dates for facilities.

Collateral type

Type of Islamic

financing

contract

Collateral value Gross exposure % of coverage

Listed securities * Murabaha

financing 44,132 28,914 152.63%




21 | P a g e

5.6 Earnings prohibited by Sharia’a

During the period, the Bank did not have any earnings from non-Islamic transactions that are

prohibited by Sharia’a.

5.7 Transactions with related parties

The significant balances with related parties as disclosed in the notes to the consolidated interim

financial information as at 30 June 2015 were as follows:

Associates

Key

management

personnel/

Shari'a board

members/

external

auditors

Significant

shareholders/

board

members/

entities in

which

directors are

interested

Total

Assets

Cash and bank balances

- - 193 193

Equity accounted

investees 94,016 - - 94,016

Other assets 6 - - 6

Liabilities

Placements from financial

institutions

- - 32,000 32,000

Other liabilities

- 1,335 13,928 15,263

The transactions with related parties as disclosed in the notes to the consolidated interim financial

information as at 30 June 2015 were as follows:

Associates

Key

management

personnel/

Shari'a board

members/

external

auditors

Significant

shareholders/

board

members/

entities in

which

directors are

interested

Total

Income

Share of results of

associates (1,994) - - (1,994)

Expenses

Staff costs

- 1,078 - 1,078

Financing cost on

placements from financial

institutions - - 91 91

Other operating expenses - 1,090 - 1,090

Impairment allowance 20,000 - - 20,000




22 | P a g e

Related party transactions were on an arm’s length basis.

6 Market risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign

exchange rates and commodity prices will affect the Bank’s income or the value of its holdings of

financial instruments. The objective of market risk management is to manage and control market risk

exposures within acceptable parameters, while optimizing the return on risk.

The Bank does not maintain a trading portfolio in commodities, equities or sukuk. Therefore, there is

no trading book market risk exposure.

As at 30 June 2015, the Bank’s major source of market risk was from foreign exchange open position

which resulted in a capital charge of USD 5,491 thousand.

6.1 Capital requirements for market risk

The Bank follows standardised approach for measuring the regulatory capital required for market risk.

Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of

the Bank and is risk weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted

exposure (RWE)

Capital

requirement @

12.5%

Maximum RWE

during the

period

Minimum RWE

during the

period

Foreign exchange

risk 68,639 8,580 68,639 67,916

6.2 Foreign currency translation risk

The Bank is also exposed to foreign currency translation risk from its investment in foreign operations

(associate in Libya and joint venture in Bulgaria) which is currently un-hedged as per below table:

Nature of exposure Movement in

exposure

Foreign currency

translation reserve

Earnings impact of

foreign exchange

transactions

Investment in Associate in

Libya - (2,170) -

Investment in joint venture in

Bulgaria - (2,662) -




23 | P a g e

7 Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and

systems or loss resulting from external events. Operational risk also includes Legal and Sharia’a

non-compliance risk but excludes strategic and reputational risks.

Currently, the Bank conducts its business from a principal office in Bahrain and a representative office

in Abu Dhabi and in accordance to well-defined processes and procedures. These processes and

procedures include a number of internal controls, including segregation of duties to avoid conflict of

interest and other internal checks, which are designed to prevent either inadvertent staff errors or

malfeasance prior to the release of a transaction. The critical data from the SWIFT system used by

Operations Department is replicated online. Data for other key departments namely Human Resources,

Treasury and Financial Control is replicated at the end of the working day on the disaster recovery site.

The Bank has successfully tested three scenarios namely accessing the live systems in the head office

in Bahrain Financial Harbour remotely from the business continuity center, accessing data in the

disaster recovery site from head office and lastly accessing systems remotely from laptops using Citrix

clients with 2 way authentication.

7.1 Operational risk management

The Bank has developed and implemented all relevant operational risk management policies and

procedures. Risk and Control Self Assessment (RCSA) for Operational Risk is periodically conducted

in coordination with all departments to evaluate (and where required, mitigate) operational risk

exposures. The last round of RCSAs was conducted during the third quarter of 2014 using a

well-recognized industry standard operational risk system. Loss data collection and KRI reporting are

also performed through the system. The Bank monitors the key risks and operational risk losses on an

ongoing basis and regularly reports the position to senior management and the Board.

7.2 Legal compliance and litigation

As on the reporting date, the Bank had no material legal contingencies including pending legal actions.

The Bank’s legal risks are mitigated through legal counsel review of transactions and documentation,

as appropriate. Where possible, the Bank uses standard formats for transaction documentation.

7.3 Sharia’a compliance

The Sharia’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and

supervising the activities of the Bank in order to ensure that they are in compliance with the rules and

principles of Islamic Sharia’a. The Bank has a dedicated internal Sharia’a reviewer, who performs

ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes

and also reviews compliance with the requirements of the Sharia’a standards prescribed by AAOIFI.

The SSB reviews and approves all products and services before launching and offering to the

customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is

issued by the SSB confirming the Bank’s compliance with Sharia’a rules and principles.

During the period, no non-Sharia’a compliant income was generated and no instances of Shari’a

violations were identified.




24 | P a g e

7.4 Capital requirements for operational risk

The Bank follows the Basic Indicator Approach to evaluate operational risk charge in accordance with

the CBB capital adequacy module for Islamic banks. According to this approach, Bank’s average gross

income for past three financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a

multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge. The

operational risk capital requirement is based on the average of the actual gross income for the last three

years.

USD 000’s

Average gross

income

Risk weighted

exposure

Capital charge

at 12.5%

Operational risk 85,775 160,828 20,104

8 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its

financial liabilities. The Bank’s approach for managing liquidity is to ensure, as far as possible, that it

will always have sufficient liquidity to meet its liabilities when they become due, under both normal

and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s

reputation.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as of

30 June 2015:

Liquidity Ratios 30 June 2015

Cash and Cash equivalents1 / Total Assets 10.55%

Liquid Assets2 / Total Assets 41.04%

Short-term Assets / Short-term Liabilities 1.0x

Inter Bank Placements / Inter Bank Borrowings 1.0x

Gearing Ratio (Total Liabilities / Total Equity) 0.2x

1 Cash and cash equivalents include cash and balances with banks, amounts placements with financial

institutions and investments in short-term government sukuks with original maturities of 90 days or

less.

2 Liquid assets include cash and cash equivalents, investments in sukuk and quoted equity investments.




25 | P a g e

8.1 Maturity profile

Maturity analyses of assets and liabilities based on residual contractual / expected maturity as of 30 June 2015 as per reviewed consolidated interim financial

information is as follows:

Up to 3

months

3 to 6

months

6 months to

1 year 1 to 3 years 3 to 5 years

5 to 10

years

10 to 20

years

*No fixed

maturity Total

Assets

Cash and bank balances 20,520 - - - - - - - 20,520


institutions 107,044 - - - - - - - 107,044

Murabaha financing 5,567 - - 28,914 - - - 34,481

Ijarah assets - - - - - - - 484,681 484,681

Investment securities 11,728 - - 369,940 102,800 45,202 - 529,670

Equity accounted investees - - - - - - 94,016 94,016

Other assets 865 1,879 33,944 1,720 - - - 661 39,069

Property and equipment - - - - - - - 10,389 10,389

Total assets 145,724 1,879 33,944 400,574 102,800 45,202 - 589,747 1,319,870

Liabilities


institutions 105,201 - - - - - - - 105,201

Financing for ijarah assets 47,498 1,183 2,166 8,867 9,559 34,043 - - 103,316

Other liabilities 17,271 - 6,756 - 4,471 - - - 28,498

Total liabilities 169,970 1,183 8,922 8,867 14,030 34,043 - - 237,015

Net gap (24,246) 696 25,022 391,707 88,770 11,159 - 589,747 1,082,855

Cumulative net gap (24,246) (23,550) 1,472 393,179 481,949 493,108 493,108 1,082,855 -

Commitments 117 117 235 861 - - - 1,330

*This includes certain assets which do not have any contractual maturity




26 | P a g e

9 Profit rate risk in the banking book

Profit rate risk in banking book is the exposure of the Bank’s financial condition to adverse movements

in profit rates. Changes in profit rates affect the Bank’s earnings by changing its net profit income and

the level of other profit rate sensitive income and operating expenses. Changes in profit rates also

affect the underlying value of the Bank’s assets, liabilities, and commitments because of the absolute or

economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily

arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

The MRC is responsible for recommending the profit rate policy, setting limits and guidelines. The

same is reviewed by the Board Audit and Risk Committee and is approved by the Board.

The Bank has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of

mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to

shift in yield curve resulting in change in the economic value of cashflows. The rate sensitive assets

mainly comprise short-term interbank placements and Sukuk. A part of these placements are funded by

rate sensitive liabilities in the form of short-term interbank deposits. The short-term nature of these

items and high degree of correlation between profits earned and paid on them minimises the basis risk.

The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity.

The Bank is not exposed to optionality risk arising due to embedded options in rate sensitive assets or

liabilities.

The Bank’s profit rate sensitive assets comprise placements with financial institutions, Sukuk

investments and Islamic Financing Facilities. On the liabilities side, the Bank’s profit bearing liabilities

include mainly placements from central bank and other financial institutions. The Board has approved

limits on profit rate sensitivity in each time bucket.

Profit rate risk in the banking book is managed principally through monthly monitoring of the

re-pricing gaps and the impact of profit rate changes on the Economic Value of Equity (EVE). The

Bank ensures that the re-pricing gap and the impact on EVE as a result of shifts in profit rates do not

exceed the pre-approved limits set on both. This is measured based on the impact of a parallel shift in

the yield curve on EVE which is the sum of the impact on earnings and impact on balance sheet.

The impact on earnings (measured by the sensitivity of Net Profit Income (NPI)) is calculated by

estimating the change in Profit Income of the Bank due to a stipulated change in the profit rates of

assets and liabilities over a time horizon of one year. The Bank assumes a 2% change (i.e. 200 basis

points) in rates of assets and liabilities to calculate the dollar impact on earnings on the residual period

up to one year. The Bank also assumes that the cashflow duration for a bucket is the mid-point of

bucket.

The impact on balance sheet is calculated using the leverage adjusted duration gap approach and

assesses the impact of changes in the market profit rates on the Bank’s total assets as a percentage of

the Bank’s equity. The higher the duration, the higher shall be the profit rate sensitivity of a financial

instrument and vice-versa.

The Bank ensures that shift in profit rates does not result in the overall economic value based on the

re-pricing gaps to exceed the limits set on the economic value of equity. This is assessed based on the

impact of a parallel shift in the yield curve on the expected Net Profit Income for up to one year

horizon and the economic value of the Bank’s equity on a regular basis.




27 | P a g e

A summary of the Bank’s profit rate gap position is as follows:

Up to 3

months

3 to 6

months

6 months

to 1 year

1 to 3

years

Over 3

years Total

Assets


institutions 107,044 - - - - 107,044

Murabaha financing 5,567 - - 28,914 - 34,481

Investment securities 11,728 - - 156,163 148,001 315,892

Total assets 124,339 - - 185,077 148,001 457,417

Liabilities


institutions 105,201 - - - - 105,201

Financing for ijarah

assets 47,498 1,183 2,166 8,867 43,602 103,316

Total liabilities 152,699 1,183 2,166 8,867 43,602 208,517

Profit rate sensitivity gap (28,360) (1,183) (2,166) 176,210 104,399 248,900

The impact on EVE, which is the sum of the impact on earnings and impact on balance sheet, to a 200

basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in

yield curves and a constant statement of financial position), are as follows:

USD 000’s

Impact of 200bp increase in profit rates: 30 June 2015

Impact on earnings 4,978

Impact on balance sheet (27,393)

Impact on Economic Value of Equity (22,415)

Impact of 200bp decrease in profit rates: 30 June 2015

Impact on earnings (4,978)

Impact on balance sheet 27,393

Impact on Economic Value of Equity 22,415

The overall impact on EVE for a 200 bps shock is within the limit prescribed by the Basel Committee

on Banking Supervision as well as the Bank’s more conservative internal limit.




28 | P a g e

10 Reputational risk

Reputational risk is the risk that negative perception regarding the Bank’s business practices or internal

controls, whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation

that could have an adverse impact on liquidity or capital of the Bank. Reputation is an important asset

and among the issues that could affect the Bank’s reputation is the inability to exit from investments,

lower than expected returns on investments and poor communication with investors. As at 30 June

2015, the Bank was not exposed to any significant reputational risk.

The Bank has developed adequate policies and procedures to identify, monitor and address all potential

risks that may arise from all such activities. The Bank has also developed an internal dashboard for

monitoring and reporting reputational risk exposures which is quarterly presented to the BARC.

The Bank considers complaints from all investors/customers seriously. These can adversely affect the

Bank’s reputation and if it is left unattended these can also lead to litigation and possible censure by the

regulatory authorities. The Bank has a formal process of handling complaints from

investors/customers, in line with the CBB’s requirements. Accordingly, the Bank also appointed a

Customer Complaints Officer in 2012.

11 Strategic risk

Strategic risk is the current and prospective impact on earnings or capital arising from adverse business

decisions, improper implementation of decisions, or lack of responsiveness to industry changes.

Strategic risk management practices are designed to ensure the comparability of the Bank’s strategic

goals, the resources deployed against these goals and the quality of implementation. The Bank has

developed adequate policies and procedures to identify, monitor and address strategic risk which were

duly approved by the Board.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk and regulatory compliance risk etc.

which are inherent in all business and not easily measurable or quantifiable. The Bank currently does

not have funding from equity of investment account holders and off balance sheet equity of investment

account holders and hence is not exposed to fiduciary or displaced commercial risks. The Bank as a

matter of policy prepares its business plan in consultation with the Board to incorporate the

shareholders expectations and regularly reviews and monitors financial and marketing strategies,

business performance with respect to the business plan, new legal and regulatory developments and

their potential impact on the Bank’s business and corporate governance practices to ensure avoidance

of any regulatory non-compliance.

13 Regulatory Compliance

There were no penalties paid to the CBB as on 30 June 2015.




29 | P a g e

14 Basel III Ratios

As part of its commitment to strengthening risk management practices and adopting industry best

practices, the Bank is currently monitoring Basel III ratios on a periodic basis as required by the CBB.

Detailed below are the Basel III Ratios for the Bank as of 30 June 2015:

SN Basel III Ratios Minimum

Limit Set by

CBB

As of

30 June

2015

1 Common Equity Capital

Ratio - Consolidated 4.5% 30.74%

2 Common Equity Capital

Ratio - Solo 6.5% 32.18%

3 Total Capital Ratio -

Consolidated 12.5% 30.82%

4 Total Capital Ratio -

Solo 8% 32.26%

5 Liquidity Coverage Ratio 60% 340%

6 Net Stable Funding Ratio Note 1 115%

7 Leverage Ratio Note 2 78.78%

Note 1: Minimum standard for NSFR will be introduced in 2018.

Note 2: Disclosure requirement regarding Leverage Ratio will start in 2017 and migration to

Pillar I in 2018.

As evident above, the bank’s current Basel III Ratios are significantly exceeding the minimum limit set

by the CBB (where limits have been defined). The bank will continue to monitor the Basel III Ratios

(as mandated by the CBB) and will actively seek to optimize their levels.

Documents

FIRST ENERGY BANK B.S.C. (c)162.255.163.56/~firstenergybank/wp-content/uploads/... · adequacy ratio. The revised framework segregates the capital components into common equity tier