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HPIB Pillar 3 Disclosures
Page 1 of 32
Hewlett-Packard International Bank Plc
Capital Requirements Directive Pillar 3 Disclosures
Code of Conduct for Basel II Pillar 3 Disclosures
Medium Enterprises
December 2013
HPIB Pillar 3 Disclosures
Page 2 of 32
CONTENTS PAGE SECTION 1: OVERVIEW 3 SECTION 2: CAPITAL RESOURCES 5 SECTION 3: RISK MANAGEMENT 8 SECTION 4: CREDIT RISK 11 SECTION 5: TREASURY RISK 18 SECTION 6: RESIDUAL RISK 24 SECTION 7: CAPITAL RISK 25 SECTION 8: CONCENTRATION RISK 26 SECTION 9: OPERATIONAL RISK
27
SECTION 10: STRATEGIC/BUSINESS RISK 28 SECTION 11: OWNERSHIP RISK 29 SECTION 12: GOVERNANCE RISK 29 SECTION 13: RUMUNERATION 30
HPIB Pillar 3 Disclosures
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Section 1: Overview 1.1 Business Overview Hewlett-Packard International Bank (“HPIB” or the “Bank”) is a captive leasing company of Hewlett-Packard Company (“HP Co.”). The primary activity of the Bank is the provision of leases & loan facilities, rentals and asset management capabilities to clients of Hewlett-Packard to finance the acquisition of Hewlett-Packard products, which may be integrated with third party products. In addition, the Bank provides back office facilities for other Hewlett-Packard entities. 1.2 Requirements of the Capital Requirements Directive The Capital Requirements Directive (Directive 2006/48/EC) also known as the
Basel II Accord is a complex standard for capital adequacy of banks worldwide.
Basel II was implemented by HPIB on 1st January 2007.
The purpose of the Accord is to promote safety and soundness in the financial
system, align regulatory capital more closely with underlying risks and to
encourage on going investment in bank’s risk management practices by offering
incentives.
HPIB Pillar 3 Disclosures
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Basel II Menu:
The Basel II Pillar 3 disclosure requirements are specified in Articles 145-149
and Annex XII of Directive 2006/48/EC. The purpose of this document is to
report HPIB’s disclosure requirements as per Pillar 3.
Directive 2006/48/EC will be replaced by the requirements under Directive
EU575/2013 which will be applicable for financial year 2014 onwards.
1.3 Reporting Dates Where possible, information contained in this disclosure document is extracted
from the annual accounts to 31st October 2013. Where required disclosures
were not included in the annual accounts, it has been reported based on data
gathered for the quarterly submissions to the Central Bank of Ireland as at 31st
December 2013.
Minimum capital
Interest Rate Banking Book
Certification
Intervention
Reporting
Comparability
Usefulness
Standardised
Foundation
Advanced
IRB
Basic
Standardised
AMA
Credit Operational Market
Basel II
Pillar 2 Supervision
Pillar 3 Market discipline
Pillar 1 Minimum capital
HPIB Pillar 3 Disclosures
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Section 2: Capital Resources 2.1 Summary of HPIB’s approach to assessing the adequacy of internal capital to support current and future activities Historically HPIB has been, and continues to be, predominantly financed by
capital and holds a Letter of Comfort from its parent confirming continued
parental support.
HPIB has a formal internal process for assessing its internal capital adequacy.
This consists of the annual Strategic and Business Planning process. Board
and Senior management committees such as the Asset & Liability Sub-
committee (“ALCO”) and the Pricing and Residual committee meet regularly to
consider the adequacy of HPIB’s capital.
Annual Strategic and Business Planning Process The HPFS annual Strategic and Business Planning process involves the HPFS
Global Marketing Council (the HPFS EMEA Director of Marketing and Business
Development is a member of this council) reviewing:
The status of the HPFS strategic initiatives for the current year - focusing
on 1) the status of the initiatives, 2) customer profiles and needs, 3)
competition and challenges and 4) future plans
The HP Co. strategic plans for the next year/future years
Market analysis i.e. IDC and Gartner market analyses with particular
focus on the IT industry.
From these reviews high level strategies for HPFS for future years are
formulated. 80% of these strategies are HPFS global strategies with 20%
regional (EMEA) specific. The draft strategies are presented to the HPFS
Global Leadership team (GLT). The HPIB Managing Director is a member of
this team. The GLT provides feedback on the strategies to the HPFS Global
Marketing Council.
The Marketing and Business Development team create detailed plans for each
strategic initiative using the learnings from prior years, stakeholder inputs (HP
Co and the HPFS GLT) and market/HP internal changes. Key focus areas for
future years are documented and an owner allocated to each initiative. Key
activities, deliverables and measures of success are documented for each
initiative.
HPIB Pillar 3 Disclosures
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The strategic initiatives are communicated to all HPFS staff, including HPIB, at
the start of year “Kick Off” sessions and updates on progress are provided
throughout the financial year.
Annual Business Planning Process
As an output of the annual Strategic and Business Planning process the annual
Business Plans are set for each HPFS geographic region including HPIB. The
HPIB Business Plan is drafted by the Financial Planning and Analysis
department within the HPIB Finance function and is prepared with a five year
horizon. The key elements to the plan are:
Base run-outs – these reports provide details of all existing deals booked
in HPIB’s systems and how they run-off in the P&L and balance sheet
over future years. The reports are available by country and currency.
New inceptions – the planning model streams out the P&L and balance
sheet for all new deals to be booked in future years. These are also
prepared at a currency/country level. A detailed planning and
consultation process takes place to ensure that valid assumptions are
taken with regard to new business written. Growth targets are
determined by country and target margins are set out in conjunction with
the Pricing department. Assumptions are also made regarding foreign
exchange (“FX”) and interest rates with guidance from HPIB’s Treasury
department.
Asset Management targets are mainly based on lease expiration values,
together with customer specific data. These targets are set at a country
level together with the Asset Management Leader.
Bad debt assumptions are determined by the Credit department and are
set as a percentage of portfolio assets.
Inputs for interest income and expense (based on balance sheet cash /
debt level assumptions) and FX gains and losses are obtained from the
Treasury department.
Administration expenses are prepared for each function in consultation
with the function leader.
Taxation charge is agreed with the Tax department based on effective
taxation rates.
Once all inputs have been obtained and P&L and balance sheet plans
prepared, these are reviewed by HPIB senior management prior to completion
and approval.
HPIB Pillar 3 Disclosures
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Action plans are put in place to ensure HPIB meets its Business Plan, one of
the plans is to ensure sufficient capital is available to meet the projected
balance sheet and business requirements and to ensure that capital usage is
optimised.
HPIB ensures that capital is optimised through its risk management processes,
the main components of which are:
1. Credit Risk
2. Liquidity Risk
3. Market Risk (including FX, Interest Rate Risk & Treasury counterparty
risk)
4. Residual Risk
5. Capital Risk
6. Concentration Risk
7. Operational Risk
8. Business/Strategic Risk
9. Ownership Risk
10. Governance Risk
The HPIB governance structure ensures that the HPIB Board of Directors (the
“Board”) and the Board Committees and Sub-committees identify, monitor and
review each of the above risks. The management committees – Operational
Excellence Council, Credit and Investment Committee and Pricing and Residual
Committee manage the risks on a day to day basis via business metrics.
The Board reviews and approves the HPIB Business Plan on an annual basis.
Each month senior management reviews HPIB’s performance against the
Business Plan and the quarterly performance against plan is presented to the
Board.
Also ALCO meets quarterly to consider the adequacy of HPIB’s capital to
ensure that both working capital and regulatory capital requirements are met.
HPIB Pillar 3 Disclosures
Page 8 of 32
2.2 HPIB Own Funds
Tier 1 Capital 31-Oct-13
$000
Share Capital 10,036
Capital Contribution/Other Reserves 1,667,866
Revenue Reserves 764,790
Total Tier 1 Capital 2,442,692
Tier 2 Capital
Portfolio provision 33,785
Total Capital 2,476,477 Section 3: Risk Management The Bank is firmly committed to the management of risk, recognising that sound
internal risk management is essential to its prudent operation. Risk
management is given top priority throughout the Bank. Responsibility for risk
management policies and limits on the level of risk assumed lies with the Board,
who charges management with developing, presenting and implementing these
policies, controls and limits. The framework is designed to provide a
reasonable degree of assurance that no single event, or combination of events,
will materially affect the well-being of the Bank.
The Risk Committee assists the Board in fulfilling their Risk Management
responsibilities by advising on current risk exposures and future risk strategy.
ALCO, the Credit and Residual Committee and the Operational Risk Committee
report to the Risk Committee at least four times per year to assist the Risk
Committee in carrying out its duties to the Board.
Senior management plays a key role in the identification, evaluation and
management of all risks. All credit and new product decisions require direct
senior management approval. Management is supported by a comprehensive
structure of internal controls, analyses and reporting processes and periodic
examinations by the Bank's Internal audit department.
HPIB Pillar 3 Disclosures
Page 9 of 32
Management has identified HPIB’s material risks as follows:
Credit Risk (leasings/financing and treasury counterparty risk)
Liquidity Risk
Market Risk (including FX, Interest Rate Risk & Treasury Counterparty
risks)
Residual Risk (residual value exposures at end of lease term)
Capital Risk
Concentration Risk (counterparty, industry and geographic)
Operational Risk (risk of loss arising from people, processes, systems &
external events)
Business/Strategic Risk
Ownership Risk
Governance Risk
The HPIB Governance Structure:
Risk Governing Board
Committees
Governing
Management
Committees
Credit Risk Credit & Residual Committee
& Risk Committee
Credit & Investment
Committee
Liquidity Risk ALCO Committee & Risk
Committee
N/a
Market Risk ALCO Committee & Risk
Committee
N/a
Residual Risk Credit & Residual Committee
& Risk Committee
Pricing Committee
Capital Risk ALCO Committee & Risk
Committee
N/a
Concentration Risk Credit & Residual Committee
& Risk Committee
Credit & Investment
Committee
Operational Risk Operational Risk Committee &
Risk Committee
Operational Excellence
Council
Business/Strategic Risk Risk Committee N/a
Ownership Risk Risk Committee N/a
Governance Risk Audit & Compliance
Committee
Compliance Committee
HPIB Pillar 3 Disclosures
Page 10 of 32
HPIB’s appetite for risk is expressed in its Board approved Risk Appetite
statement, an extract from which is given below:
“A certain level of risk is inherent in any business and it is the responsibility of
the Board to approve the level acceptable to HPIB. The HPIB risk appetite
should be a satisfactory trade off between the level of risk and likely level of
returns. HPIB defines material risk as any risk which may significantly
adversely affect HPIB’s ability to undertake business. Any risk that causes an
impact of $20m or greater is classified as a significant risk to the business.”
3.1 HPIB Minimum Capital Requirements
MATERIAL RISKS 31-Dec-13
$000
Operational Risk 29,970
Treasury Risk 9,667
Credit Risk 230,513
270,150
HPIB Pillar 3 Disclosures
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Section 4: Credit Risk HPIB has adopted the standardised approach to Credit Risk under Pillar 1 of the CRD.
The core values and main procedures governing the provision of credit are laid
down in the HPIB Credit policy document. This has been approved by the Board
and is reviewed regularly. The Bank's credit risk management system operates
through a hierarchy of exposure discretions. All exposures over a certain level
require the approval of the Credit Committee, which is composed of senior
executives and some of the directors of the Bank. Exposures below Credit
Committee's discretion are approved by reference to the Bank’s Schedule of
Authority document.
A detailed credit review is performed on each new business case. The Bank uses
a risk rating system to evaluate the financial and repayment risk of proposed
advances and to ensure appropriate returns for assuming risks. Credit analysts
undertake a detailed review of each client prior to approval of advances. Credit
lines are approved for customers with strong credit ratings, whether this is based
on external ratings or internal risk rating scale. An annual financial review is
conducted for all credit line customers with an exposure above a $1m threshold.
The ten largest exposures are reviewed each quarter by the Board of Directors of
the Bank.
The quality lending is reviewed monthly by the Head of Credit of the Bank, the
objective of which is to provide an accurate measure of the underlying quality of
HPIB’s loan portfolio, to facilitate early identification of deterioration in quality and
to enable management to focus on problem loans as soon as weaknesses begin
to emerge. This review includes a review of the aged debtors listing, historic write
off experience and an analysis of the lease portfolio by risk category.
The table below shows the gross maximum exposure to credit risk for the
components of the balance sheet including derivatives, including the amount of
financed assets that are considered to be impaired (impaired assets are fully
provided against). The main considerations for the impairment assessment are
where payments are due for more than 90 days and there are known cash-flow
difficulties for the lessee. In the event of a default the Bank reserves the right to
recover the financed assets.
HPIB Pillar 3 Disclosures
Page 12 of 32
Extract from HPIB statutory accounts (note 26) 31 October 2013
Gross maximum exposure to credit risk 2013 Investment Non Investment Impaired maximum
Grade Grade exposure
2013 2013 2013 2013
US$’000 US$’000 US$’000 US$’000
Cash and balances with Central Banks 133,029 - - 133,029
Loans and advances to banks 457,462 - - 457,462
Lease assets (gross of provisions) 1,752,448 1,248,292 8,142 3,008,882
Financial fixed assets - - - -
Other assets 220,800 - - 220,800
Prepayments and accrued income 890 - - 890
Derivative financial instruments 6,927 - - 6,927
Amounts due from fellow subsidiaries 52,888 - - 52,888
Total 2,624,444 1,248,292 8,142 3,880,878
Committed credit line - - - 33,323
Total credit risk exposure 2,624,444 1,248,292 8,142 3,914,201
The value of leases which would have been past due or impaired but have been restructured during the year is $5,001k (2012: $6,326k).
There is no difference in the accounting treatment of these leases.
Gross maximum exposure to credit risk 2012 Investment Non Investment Impaired maximum
Grade Grade exposure
2012 2012 2012 2012
US$’000 US$’000 US$’000 US$’000
Cash and balances with Central Banks 90,491 - - 90,491
Loans and advances to banks 385,393 - - 385,393
Lease assets (gross of provisions) 1,707,387 1,134,793 6,504 2,848,684
Financial fixed assets 1,046 - - 1,046
Other assets 136,517 - - 136,517
Prepayments and accrued income 1,235 - - 1,235
Derivative financial instruments 42,642 - - 42,642
Amounts due from fellow subsidiaries 39,447 - - 39,447
Total 2,404,158 1,134,793 6,504 3,545,455
Committed credit line - - - 61,133
Total credit risk exposure 2,404,158 1,134,793 6,504 3,606,588
Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the
maximum risk exposure that could arise in the future as a result in changes in value.
2013 2012
Specific provision for bad debts US$’000 US$’000
Impaired 8,142 6,504
Greater than 180 days provision 2,105 3,605
10,247 10,109
Where financial instruments are recorded at fair value, the amounts shown above
represent the current credit risk exposure but not the maximum risk exposure that
could arise in the future as a result in changes in value. All figures are based on
financial year end 31 October 2013 and 31 October 2012 balances.
HPIB Pillar 3 Disclosures
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Impaired exposure by industry type
31 December 2013 $000
Finance, Insurance, Real Estate 2,374
Manufacturing 1,422
Retail Trade 619
Services 3,571
Wholesale Trade 46
8,032
Impaired exposure by geographical area
31 December 2013 $000
France 128
Germany 2,489
Czech Republic 192
Finland 46
Portugal 1,336
Spain 1,054
UK 2,787
8,032 Past due exposure by industry type 31 December 2013 $000
Agriculture 31
Construction 1,656
Finance, Insurance, Real Estate 6,017
Manufacturing 63,458
Mining 24
Public Admin 288
Retail Trade 5,388
Services 16,772
Transportation, Communcations, Energy 31,621
Wholesale Trade 3,763
129,018
HPIB Pillar 3 Disclosures
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Past due exposure by geographical area
31 December 2013 $000
Ireland 2,159
Austria 455
Belgium 1,353
Czech Republic 3,648
Denmark 441
Finland 764
France 10,243
Germany 15,676
Israel 4,292
Netherlands 855
Norway 743
Portugal 3,098
Romania 1,635
Slovenia 237
Spain 17,372
Sweden 37,295
Switzerland 1,987
United Kingdom 26,765
129,018 Concentrations of credit risk
The Bank's financial assets can be analysed by the following geographical
regions:
Extract from HPIB statutory accounts (note 26) 31 October 2013
Gross maximum Gross maximum
exposure 2013 exposure 2012
US$’000 US$’000
United Kingdom 1,104,345 1,063,673
Germany 618,904 594,617
Ireland 406,534 389,816
France 350,987 296,628
Spain 250,711 249,008
Sweden 222,729 215,268
Luxembourg 171,927 88,968
Netherlands 132,355 121,973
Switzerland 83,570 85,102
Portugal 59,178 62,141
Norway 50,855 54,872
Denmark 44,103 25,877
Finland 35,843 44,006
Other countries 127,146 115,755
Total 3,659,187 3,407,704
HPIB Pillar 3 Disclosures
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Total net exposure by geographical area and exposure class
31 December 2013 (US$000) US$000
Central
Government/C
entral Banks Admin Bodies Institution Corporate Retail Other Total
Ireland 54,958 857 165,151 12,356 5,828 145,026 384,177
Austria - - 89 7,789 465 18,761 27,104
Belgium - 440 3,074 12,115 5,418 14,963 36,011
Czech Republic - - 207 3,556 855 16,724 21,342
Denmark 14 - 871 14,497 2,011 18,178 35,570
Finland - 78 9 9,834 448 19,476 29,844
France - 230 12,350 111,932 28,255 159,465 312,232
Germany 258 2,435 19,422 114,714 25,266 349,568 511,664
Iceland - - 26 2,711 7,488 - 10,225
Israel - - - 1,597 1,232 1,942 4,771
Luxembourg - - 139,750 8,237 - 3,595 151,582
Netherlands 651 8,008 384 65,872 17,404 30,238 122,557
Norway - 11 2,018 10,457 2,006 31,549 46,041
Portugal - 3 1,984 34,243 7,565 15,475 59,270
Romania - 21 3 5,146 5,481 4,459 15,110
Slovakia - - - - - - -
Slovenia - - - 4,117 1,373 2,059 7,549
Spain 249 146 2,369 105,662 25,040 85,266 218,733
Sweden 42 11,067 1,959 34,312 5,910 163,387 216,677
Switzerland 1,402 1,180 3,789 12,317 2,700 36,246 57,634
United Kingdom 1,038 11,791 149,839 481,826 66,656 471,477 1,182,627
58,612 36,267 503,296 1,053,290 211,401 1,587,854 3,450,720 Minimum related capital requirements by exposure class 31 December
2013 Standardised exposure class $000 Minimum capital
requirements
Central governments or central banks 208
Administrative bodies 637
Institutions 10,607
Corporate 82,474
Retail 13,078
Other items 123,509
Total for standardised approach 230,513
HPIB Pillar 3 Disclosures
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Total lease/financing exposure by industry type
$000 $000 $000
31 December 2013 Tangible fixed assets
Finance lease & loan
receivables Total
Agriculture 5,167 1,798 6,965
Construction 29,014 29,978 58,992
Finance, Insurance, Real Estate 304,614 801,260 1,105,874
Manufacturing 390,960 428,664 819,624
Mining 2,554 609 3,163
Public Admin 93,571 42,441 136,012
Wholesale/Retail Trade 124,060 136,788 260,848
Services 69,524 148,895 218,419
Transportation, Communcations, Energy 177,551 206,000 383,551
1,197,015 1,796,433 2,993,448
4.1 External Credit Assessment Institutions (ECAIs)
HPIB has nominated Standard and Poors as its external credit assessment
institution. Customers that do and do not have an external credit rating agency
rating, are allocated an internal credit rating.
4.2 Portfolio and Specific Provisioning Policy
The objective of HPIB’s collective reserve and specific bad debt provisioning
policy is to establish write-offs within specific reserve targets. HPIB maintains
collective reserves for uncollectability in the lease portfolio and specific reserves
for credit losses from identified customers.
The collective bad debt reserve is based on a percentage of the lease portfolio
assets. The percentage is reviewed on a quarterly basis and is based on
several factors, which include:
Historical performance
Portfolio risk profile
Competitive benchmarking
Specific bad debt reserves are established for identified loss exposures on
leases or loans that have not yet been written-off within the lease accounting
system. A write-off or specific reserve of billed accounts receivable is
mandatory at 180 days past due, unless specific exceptions are granted by the
relevant individuals identified with the HPIB Credit Policy and HPIB Schedule of
Authorisation. A write-off or specific reserve may be warranted sooner if it is
deemed that the account is not collectible. The remaining net investment is to
be reviewed on a deal by deal basis with final reserve decisions based on credit
quality and the status of collection efforts.
HPIB Pillar 3 Disclosures
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Extract from HPIB statutory accounts (note 6) 31 October 2013
Provision for impairments 2013 2013 2013 2012
US$’000 US$’000 US$’000 US$’000
Specific Collective Total Total
At 1 November 10,109 31,824 41,933 43,502
Provisions acquired during period - -
Provisions created during period 20,371 14,656 35,027 25,377
Provisions released during period (20,511) (14,731) (35,242) (25,195)
Adjustments including FX 278 2,036 2,314 (1,751)
At 31 October 10,247 33,785 44,032 41,933
The charge against profits is analysed as follows:
Provisions created during period 20,371 14,656 35,027 25,377
Provisions released during period (20,511) (14,731) (35,242) (25,195)
Write-offs 21,334 - 21,334 12,542
Recoveries (6,135) - (6,135) (4,280)
Charge against profits 15,059 (75) 14,984 8,444
HPIB Pillar 3 Disclosures
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Section 5: Treasury Risk 5.1 Liquidity Risk
The liquidity risk management process is designed to ensure that the Bank is
able to honour all of its financial commitments as they fall due. As assets are
financed primarily by capital resources, liquidity is monitored by the Treasury
and Treasury Control departments. The liquidity position of the Bank is
reviewed by the Board of Directors on a quarterly basis.
At the 31st October 2013 the Bank had third party financing requirements of
approximately US$675 million. This debt may vary depending on the
requirements of the business.
The debt is drawn from the Bank’s various debt programmes – a European
Certificate of Deposit programme with a maximum value of US $500 million,
an Interbank programme with uncommitted facilities of US $506 million and a
Corporate programme. Also the Bank utilises inter-company funding from HP
Co for certain categories of business. The main component of the Bank’s
financing, totalling US$2.4 billion, is provided by way of capital contributions
from HP Co and the Bank's retained earnings. HP Co is committed to
providing for the Bank's on-going financing as required.
The Bank ensures its liquidity ratios meet the requirements of the Central Bank
or Ireland’s “Management of Liquidity Risk” guidance note. The Bank is in full
compliance with the qualitative and quantitative requirements of this directive.
Specifically the Bank is committed to maintaining appropriate liquidity ratios
across all the prescribed time bands. These ratios are achieved by ensuring
the mix of debt and investment maturities are consistent with both the needs of
the business and the required ratios set out by the Central Bank of Ireland. In
addition, the Bank maintains a statutory deposit with the Central Bank of
Ireland.
The liquidity ratio at the end of financial year, 31 October 2013 was as follows:
2013 2012 Regulator Requirements
% % %
31 October
0 - 8 days 340 363 100
8 - 30 days 210 264 90
HPIB Pillar 3 Disclosures
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The following table shows an analysis of assets and liabilities according to when
they are expected to mature or be settled:
Extract from HPIB statutory accounts (note 26) 31 October 2013 Liquidity analysis 31 October 2013 Liquidity analysis 2013
Not more than 3 months
More than 3 months but not
more than 6 months
More than 6 months but not
more than 1 year
More than 1 year but not
more than 5 years
US$ '000 US$ '000 US$ '000 US$ '000
Assets
Cash and balances with Central Bank 133,029 - - -
Loans and advances to banks 457,462 - - -
Tangible fixed assets 25,582 36,723 127,585 1,030,932
Loans and advances to customers 5,003 24,111 51,958 1,603,006
Other assets 220,800 - - -
Cash flow hedges 984 897 1,259 3,026
Derivatives at fair value 761 - - -
Amounts due from fellow subsidiaries 52,888 -
Total financial assets 896,509 61,731 180,802 2,636,964
Liabilities
Deposits by banks 344,178 67,598 - -
Deposit by customers (including debt securities in issue) 258,472 157,778 - -
Other liabilities 34,716 - - -
Accruals 17,194 - - -
Cash flow hedges 11,078 7,440 19,273 37,101
Derivatives at fair value 2,953 - - -
Amounts due to fellow subsidiaries 109,738 69,490 54,051 223,155
Total financial liabilities 778,329 302,306 73,324 260,256
More than 5 years Total
US$ '000 US$ '000
Assets
Cash and balances with Central Bank - 133,029
Loans and advances to banks - 457,462
Tangible fixed assets 5,180 1,226,002
Loans and advances to customers 54,770 1,738,848
Other assets - 220,800
Cash flow hedges - 6,166
Derivatives at fair value - 761
Amounts due from fellow subsidiaries - 52,888
Total financial assets 59,950 3,835,956
Liabilities
Deposits by banks - 411,776
Deposit by customers (including debt securities in issue) - 416,250
Other liabilities - 34,716
Accruals - 17,194
Cash flow hedges - 74,892
Derivatives at fair value - 2,953
Amounts due to fellow subsidiaries - 456,434
Total financial liabilities - 1,414,215
Net liquidity surplus 2,421,741
HPIB Pillar 3 Disclosures
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Liquidity analysis 31 October 2012
Liquidity analysis 2012
Not more than 3 months
More than 3 months but
not more than 6 months
More than 6 months
but not more than 1
year
More than 1 year but
not more than 5 years
US$ '000 US$ '000 US$ '000 US$ '000
Assets
Cash and balances with Central Bank 6,264 - - -
Loans and advances to banks 469,620 - - -
Tangible fixed assets 16,585 32,780 122,323 1,161,390
Loans and advances to customers 4,576 23,428 51,812 1,355,855
Other assets 136,517 - - -
Cash flow hedges 5,305 6,852 11,530 17,632
Derivatives at fair value 1,323 - - -
Amounts due from fellow subsidiaries 39,447 -
Total financial assets 679,637 63,060 185,665 2,534,877
Liabilities
Deposits by banks 371,617 10,043 - -
Deposit by customers (including debt securities in issue) 190,157 252,786 - -
Other liabilities 43,298 - - -
Accruals 18,823 - - -
Cash flow hedges 5,574 6,003 14,767 32,619
Derivatives at fair value 1,920 - - -
Amounts due to fellow subsidiaries 4,705 - - -
Total financial liabilities 636,094 268,832 14,767 32,619
More than 5 years Total
US$ '000 US$ '000
Assets
Cash and balances with Central Bank - 6,264
Loans and advances to banks - 469,620
Tangible fixed assets 5,740 1,338,818
Loans and advances to customers 32,261 1,467,932
Other assets - 136,517
Cash flow hedges - 41,319
Derivatives at fair value - 1,323
Amounts due from fellow subsidiaries - 39,447
Total financial assets 38,001 3,501,240
Liabilities
Deposits by banks - 381,660
Deposit by customers (including debt securities in issue) - 442,943
Other liabilities - 43,298
Accruals - 18,823
Cash flow hedges - 58,963
Derivatives at fair value - 1,920
Amounts due to fellow subsidiaries - 4,705
Total financial liabilities - 952,312
Net liquidity surplus 2,548,928
-
HPIB Pillar 3 Disclosures
Page 21 of 32
5.2 Market Risk
Market risk is the risk that the fair value or future cash flows of financial instruments
will fluctuate due to changes in market variables such as interest rates and foreign
exchange rates. The Bank reduces its exposure to market risk by entering into
forward currency contracts which hedges any risk associated with foreign currency
fluctuation.
Capital N/A N/A
Operating leases Fixed rate. The Bank is exposed to interest rate risk on the
portion of the balance sheet that is funded by debt; mis-
match approved by board
Balance sheet hedging process which is monitored
monthly
Liabilities
Bank and customer deposits Deposits are short term. Interest rate risk is minimised due
to the short average tenor of investments and deposits.
All investments are hedged as part of the Balance Sheet
FX risk management process.
Bank investments Investments are short term. Interest rate risk is minimised
due to the short average tenor of investments and
deposits.
All investments are hedged as part of the Balance Sheet
FX risk management process.
Finance leases & loans Fixed rate. The Bank is exposed to interest rate risk on the
portion of the balance sheet that is funded by debt; mis-
match approved by board
Balance sheet hedging process which is monitored
monthly
Assets Interest Rate Foreign
Exchange
5.3 Interest Rate Risk Interest rate risk arises when there is a mismatch between positions which are
subject to interest rate adjustment within a specific period. The Bank does not have a
trading book and all interest rate risk is in the banking book. At this time, the Bank’s
lease portfolios are primarily financed by the Bank’s capital resources. Where the
lease portfolio is not funded by capital resources it is funded by third party debt and
is therefore exposed to US dollar interest rate risk due to the duration mismatch
between Assets and Liabilities.
The effect on net interest income, and therefore profit before tax over a 3 year
period, of a 1 basis point shift in the yield curve would be as follows:-
+1 basis points -1 basis points +1 basis points -1 basis points
2013 2013 2012 2012
US$’000 US$’000 US$’000 US$’000
Currency
USD 45 (45) 53 (53)
HPIB Pillar 3 Disclosures
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5.4 Currency Risk Currency risk is the risk that the value of an asset or a liability will fluctuate due to
changes in foreign exchange rates.
The table below (extract Note 21 HPIB Statutory Accounts 2013) shows the Bank’s
transactional currency exposure in the banking book; in other words those non-
structural exposures that give risk to the net currency gains and losses recognised in
the profit and loss account. Such exposures comprise the monetary assets and
monetary liabilities of the Bank that are not denominated in the operating (or
"functional') currency of the Bank which is US Dollars. The objective is to mitigate
this exposure through active management by the Treasury department.
Management of the transactional currency exposures is performed by the Treasury
department. Forward rate contracts are entered into to manage this exposure. The
actual currency exposures are monitored against the anticipated exposures which
were hedged by the Treasury department. The exposure is reviewed as part of the
monthly financial review carried out by the Managing Director of the Bank.
The Bank mitigates the effect of currency fluctuations caused by the revaluation of
the Balance Sheet at the end of each accounting period by hedging all assets with
different source currencies from the Bank’s functional currency of US Dollars,
thereby hedging all material foreign currency denominated exposures.
As a result of the use of derivative instruments, the Bank is exposed to the risk that
counterparties to derivative contracts will fail to meet their contractual obligations. To
mitigate the counterparty credit risk, the Bank has a policy of only entering into
contracts with carefully selected major financial institutions based upon their credit
ratings and other factors, and the Bank maintains risk limits that correspond to each
institution’s credit rating and other factors. The Bank’s established policies and
procedures for mitigating credit risk on principal transactions and short-term cash
include reviewing and establishing limits for credit exposure and continually
assessing the creditworthiness of counterparties. Master agreements with
counterparties include master netting arrangements as further mitigation of credit
exposure to counterparties. These arrangements permit the Bank to net amounts
due from the Bank to a counterparty with amounts due to the Bank from the same
counterparty.
To further mitigate credit exposure to counterparties, the Bank may enter into
collateral security arrangements with its counterparties. These arrangements require
the Bank to post collateral or to hold collateral from counterparties when the
derivative fair values exceed contractually established thresholds which are generally
HPIB Pillar 3 Disclosures
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based on the credit ratings of the Bank and its counterparties. Such funds are
generally transferred within two business days of the due date.
As of October 31, 2013, the Bank posted US$92.87 million under these collateralized
arrangements, all of which was in cash. The Bank did not have any derivative
instruments under these collateralized arrangements that were in a significant net
liability position.
Extract from HPIB statutory accounts (note 21) 31 October 2013
Balance sheet by currency 2013 2013 2012 2012
US$’000 US$’000 US$’000 US$’000
(incl. effects of (incl. effects of
Assets: hedging) hedging)
Denominated in United States Dollars 503,860 3,143,582 342,371 3,151,884
Denominated in Euro 1,849,580 2,077,503 1,711,475 1,981,640
Denominated in GBP 1,119,332 1,119,332 1,095,055 1,095,055
Denominated in other currencies 410,782 417,387 390,825 392,664
Total assets 3,883,554 6,757,804 3,539,726 6,621,243
Liabilities:
Denominated in United States Dollars 2,837,533 3,072,064 2,904,784 3,176,789
Denominated in Euro 762,461 2,115,562 574,591 1,967,424
Denominated in GBP 222,700 1,150,089 44,672 1,092,757
Denominated in other currencies 60,860 420,089 15,679 384,273
Total liabilities 3,883,554 6,757,804 3,539,726 6,621,243
HPIB Pillar 3 Disclosures
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Section 6: Residual Risk
Residual value exposure arises where, at lease inception, there is a future
expectation that an asset value remains at the end of the primary term which can
be recovered through a secondary transaction. Details of unguaranteed residual
values are outlined below. These residual values are arrived at through a detailed
analysis of transaction history on asset recovery to projected future values.
Residual realisation is constantly monitored.
Extract from HPIB Statutory Accounts dated 31st October 2013 (Note 32):
Residual Values
Details of unguaranteed residual values are outlined below
2013 2012
US$’000 US$’000
Finance Leases Finance Leases
- Over 5 years 1,540 2,741
- 5 years or less but over 3 years 22,063 21,449
- 3 years or less but over 1 year 23,007 25,097
- 1 year or less 2,279 1,108
48,889 50,395
US$’000 US$’000
Tangible Fixed Assets Tangible Fixed Assets
- Over 5 years - 89
- 5 years or less but over 3 years 6,677 22,281
- 3 years or less but over 1 year 134,237 127,681
- 1 year or less 88,986 72,973
229,900 223,024
On a monthly basis the Pricing and Residual Committee review residual risk
decisions on an individual product group basis. This assessment includes the
review of historical residual recovery rates, along with customer behaviours at
end of term. Scenario testing is employed to assess impacts of predicted future
events and to ensure the financial levels of risk assigned to the product groups
are within the committee’s comfort levels.
All standard product groups are reviewed by the Pricing and Residual
Committee at least annually as per the FAS13, SEC and Sarbanes Oxley
requirements. Any impairment concerns identified through the review process
are further analysed in a specific impairment analysis and review. Corrective
measures are taken if impairment is identified.
HPIB Pillar 3 Disclosures
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Section 7: Capital Risk
The Bank is a mono-line business, therefore capital risk is measured at an
overall business level. The ALCO and Risk Committees are responsible for
monitoring Capital risk. Given the strong level of capitalisation, the major
sources of HPIB’s capital risk are:-
1 Significant loss events leading to a reduction in capital balances.
2 Rapid balance sheet growth without a corresponding increase in capital
invested.
The Bank is authorised and regulated by the Central Bank of Ireland and is
required under the relevant regulations to maintain sufficient capital to meet its
liabilities. The Bank has in excess of over 9 times capital cover in place as
calculated under Pillar 1.
Capital Requirement
31-Dec-13
$000
Share Capital 10,036
Capital Contribution/Other Reserves 1,667,866
Revenue Reserves 764,790
Total Tier 1 Capital 2,442,692
Tier 2 Capital 33,785
Total Capital Resources 2,476,477
Capital Requirement 270,150
Total Capital Excess 2,206,327
HPIB Pillar 3 Disclosures
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Section 8: Concentration Risk
The HPIB Credit Policy has defined the credit risk appetite in terms of country
limits, customer concentration limits and business segment limits. These limits
are presented to the Board when the Credit Policy is reviewed annually. The
policy contains four specific limits detailed below:
Prudential Maximum Exposure: HPIB’s exposure to a customer or group of
customers, other than a credit institution, should not exceed 25% of own funds.
Geographical Restrictions: HPIB’s exposure to any one country shall not
exceed 40% of its total portfolio.
Inter-group Exposures: HPIB will not provide lease or loan credit to the HP Co
without prior approval from the Central Bank, and if approved should not exceed
10% of own funds. Industry Restrictions: HPIB’s exposure to a specific industry
shall be limited to 40% of its total portfolio.
These measurements are taken on a portfolio level but also, where needed, on
a transactional level. Awareness within the credit organisation is key when
reviewing/approving large customer limits and the effect the exposure would
have on a customer level but also from an industry and country risk perspective.
A review is completed annually of the concentration risk limits at the same time
as the review of the Credit Policy and annual Stress Testing scenarios to
ensure appropriateness of limits. The review also includes an understanding of
the HPIB Business Plan and its potential impact on the structure of the portfolio.
This review is presented to the HPIB Board, Risk Committee and Credit and
Residual Sub-Committee. HPIB also completes a number of stress tests on
concentration risk focusing on industry, one obligor and geographic
concentrations.
HPIB Pillar 3 Disclosures
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Section 9: Operational Risk HPIB has adopted the standardised approach to Operational Risk.
Operational Risk is defined as the risk of loss resulting from inadequate or failed
internal processes, people, and systems or from external events. The Board
has approved the HPIB Operational Risk Management Framework.
HPIB Operational Risk Management Framework:
Risk Management Framework
Corporate Governance
Str
ate
gy
/G
oa
ls
Ind
ep
ed
en
de
nt
Assu
ran
ce
Operational Risk
External Regulatory /
LegalPeople Processes Systems Reputational
Action Plans
IdentifyRisks
IdentifyControls
AssessRisks
AssessControls
MonitorIndicators
Analyse
Near Miss/LossCauses
Reporting
Risk Environment
Compliance
Risks
Credit
Risks
Market
Risks
Liquidity
Risks
Financial
Risks
Strategic
Risks
Operational
Risks
Risk and Control Assessments (RCA) are in place for all departments. Risks
are assessed using the HPIB Risk Appetite Matrix. Controls are assessed for
their design and their performance. The RCAs are reviewed and updated
quarterly or as risk profiles change within the business. Key risks and
operational risk loss events are monitored and reported regularly to senior
management and quarterly to the Risk Committee and to the Board via the
Operational Risk Committee.
HPIB Pillar 3 Disclosures
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Section 10: Strategic/Business Risk HPIB’s strategy is to support and enhance HP Co’s product and service
solutions. HPIB enables customers to acquire complete IT solutions, including
hardware, software and services. HPIB offers innovative, customized and
flexible alternatives to balance unique customer cash flow, technology and
capacity needs.
From a risk perspective HPIB is a “monoline” business offering financing to high
end corporate and enterprise customers. The Bank does not offer financing to
consumers.
Business risk management is an integral part of the management of HPIB.
Risks are managed via Management Committees on a day to day basis and the
internal policies and procedures that govern the operations of HPIB. Schedules
of Authorisations are in place where the Board of Directors delegates the daily
activities to management.
On a quarterly basis the Board, Board Committees and the Board Sub-
Committees monitor HPIB’s performance against its business plan and
objectives. At a strategic level the Board is responsible for supervising the
management of risk by the Risk Committee in accordance with HPIB’s relevant
policies and procedures. At each Board meeting the Board review the
performance of the Risk Committee and the Board Sub-Committees – ALCO,
Operational Risk and Credit and Residual Committees.
HPIB Pillar 3 Disclosures
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Section 11 Ownership Risk
HPIB is owned by a non-financial, commercial entity, HP Co. The Central Bank
of Ireland has assigned a Pillar 2 capital add-on for this ownership risk.
Section 12 Governance Risk
Governance risk relates to the overall management approach through which
senior management manages and controls the business of HPIB. Governance
activities ensure that critical management information reaches senior
management and the Board to enable appropriate decision making.
Through the Compliance Committee, HPIB ensures that all new regulations
issued are reviewed and implemented, where applicable, within the specified
timeframes.
Governance risk is monitored on an on-going basis as part of the following processes:
Compliance Committee meetings every three weeks
Quarterly Board Sub-Committee meetings
Quarterly Risk Committee meetings
Quarterly Audit and Compliance Committee meetings
Quarterly Board meetings
HPIB Pillar 3 Disclosures
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Section 13 Remuneration
This section provides brief information on the decision-making policies for
remuneration of HPIB staff (including “identified staff”) and the links between
pay and performance. These disclosures reflect the requirements set out in
Committee of European Banking supervisors’ (CEBS, now EBA) Guidelines on
Remuneration Policies and Practices, issued in December 2010.
Identified Staff
HPIB has completed an assessment process through which 14 employees have
been identified as key staff on the basis that their professional activities are
deemed to have a material impact on HPIB’s risk profile or they perform a key
control function.
Design, Structure and Decision-making process
HPIB’s Remuneration Policy is dependent on the HP Co group policies and
charter. The HPIB Board is satisfied that independent and appropriate control
functions exist in setting this policy at group level. It is the view of HPIB that this
structure avoids potential conflicts of interest and that no employee of HPIB has
significant influence in determining remuneration policies.
HPIB’s capital structure does not correlate to the level of remuneration paid to
HPIB management or employees. HPIB has historically enjoyed large levels of
capital relative to its risk assets and this is due to the operating model which HP
Co has chosen for its Irish subsidiary.
It is the intention that the HPIB Remuneration Policy and practices are
consistent with and promote sound and effective risk management. The policy
forms part of the overarching requirement to have robust governance
arrangements in place and is in line with the business strategy, objectives,
values and long-term interests of HPIB and of HP Co. The HPIB Board
approves the Remuneration Policy on an annual basis.
HPIB Pillar 3 Disclosures
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Link between pay and performance
HPIB’s independent non-executive directors are compensated a fixed amount
which is not correlated to any financial HPIB metric (e.g. cash flow, net profit)
and the other non-executive Directors serve at the behest of the Hewlett-
Packard group without compensation.
The compensation structure of employees (including other identified staff) are
covered by either HP Co remuneration policies or the world wide HP Financial
Services Incentivised Compensation Plan (ICP) Scheme and is not limited to
the results of HPIB. Overall compensation is dependent on the results of the
HP Co at group level.
Proportionality
HPIB has considered the following in assessing the application of the
proportionality principle:
Size
HPIB is a small institution with a high level of capitalisation from its parent, HP
Co. Its function is to provide funding for IT equipment and other ancillary
services. It does not engage in a high level of risk-taking, as evidenced in the
HPIB Credit and Treasury policies. HPIB is based in Ireland but operates
throughout much of the EEA. It does not, however, account for a large portion
of the financial system in any country in which it operates. HPIB also
represents a small part of HP’s total business operations.
No individual employed by HPIB falls within the definition of “high earner” (as
defined in EBA guidelines)
Internal Structure
HPIB is a wholly owned subsidiary of HP Co. While HP Co is listed on a
regulated market, HPIB is not separately listed. HPIB’s corporate goal is to
support HP Co’s business, providing financing to HP customers.
Nature, Scope and Complexity of the institution
HPIB’s business is a mono-line one with a focus on financing IT products to
commercial and enterprise customers. It does not engage in equity or bond
trading, proprietary or as agent and operates within the EEA.
HPIB Pillar 3 Disclosures
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Taking into account each of the above, HPIB is considered to be a non-complex
institution for the purposes of the Proportionality Principle.
On this basis, it has chosen to apply neutralisation to a number of provisions.
After due consideration regarding proportionality, it has been agreed that there
is no necessity to form a Remuneration Committee for HPIB. The management
function does not determine its own remuneration. This is determined by the
governing HP Co group policies and therefore it is considered that a supervisory
function is not required.
Remuneration Expenditure The following table shows the remuneration paid by HPIB to Identified Staff in 2013.
Identified Staff USD $’000s
Number of Identified Staff 14
2013 Remuneration 2,315K
2013 New sign-on and severance payments
No new identified staff received a sign-on payment during 2013 relating
to their commencement of employment
No severance payments were made during 2013 to these staff.