Pillar 3 disclosures - ICBCv.icbc.com.cn/.../2017/2016_Pillar_3_disclosures.pdf · Pillar 3 Disclosures 2016 ICBC (London) plc 1 | P a g e 1. Overview 1.1 Background ICBC (London)

ICBC (London) plc

Pillar 3 Disclosures

31 December 2016

Contents

1. Overview .............................................................................................................................. 1 1.1 Background .................................................................................................................... 1 1.2 Regulatory requirements for Pillar 3 disclosures .......................................................... 1 1.3 Scope of disclosure requirements .................................................................................. 1 1.4 Non-material, proprietary or confidential information .................................................. 2

1.5 Scope of application ...................................................................................................... 2 1.6 Basis and frequency of disclosure ................................................................................. 2 1.7 Means of disclosure and verification ............................................................................. 2 2. Governance &risk management framework ................................................................... 3 2.1 Governance – board and committees............................................................................. 3

2.2 Risk management .......................................................................................................... 5 2.2.2 Risk policy and procedure ............................................................................................. 7 3. Capital Resources ............................................................................................................... 7

3.1. Total capital available .................................................................................................... 7 4. Capital Requirements ...................................................................................................... 10 5. Capital Buffers .................................................................................................................. 12 6. Leverage ............................................................................................................................ 13

6.1 Risk statement for leverage ........................................................................................ 14 7. Asset Encumbrance .......................................................................................................... 14

7.1 Risk statement for asset encumbrance ......................................................................... 15 8. Credit risk ......................................................................................................................... 15

8.1 Credit risk management objectives and policies ......................................................... 15 8.2 Strategies and processes to manage credit risk ............................................................ 16 8.3 Structure and organisation of the credit risk function ................................................. 16

8.4 Measurement and reporting of credit risk ................................................................... 17 9. Credit risk mitigation ....................................................................................................... 20

9.1 Policies, strategies and processes for hedging, mitigating and monitoring credit risk 20 9.2 Risk Statement for credit risk ...................................................................................... 21

10. Use of external credit assessment institutions .............................................................. 21

11. Exposures to Counterparty Credit Risk (‘CCR’) ........................................................ 22 11.1 Risk statement for counterparty credit risk .................................................................. 23

12. Credit risk adjustments ................................................................................................. 23 12.1 Specific impairment and collective provisions ............................................................ 23

13. Market risk ...................................................................................................................... 26 13.1 Market risk management objectives and policies ........................................................ 26

13.2 Measurement and reporting of market risk.................................................................. 26 13.3 Risk statement for market risk ..................................................................................... 27 14. Operational risk .............................................................................................................. 28 14.1 Operational risk management, objectives and policies ................................................ 28

14. 2 Measurement and reporting of operational risk ........................................................... 28 14.3 Risk statement for operational risk .............................................................................. 28 15. Exposure to interest rate risk in the Banking Book .................................................... 29

15.1 Interest rate risk management objectives and policies ................................................ 29 15.2 Measurement and reporting of interest rate risk .......................................................... 29 15.3 Risk statement for interest rate risk ............................................................................. 30 16. Other Risks ...................................................................................................................... 30 16.1 Risk Statement for other risks .................................................................................... 31

17. Remuneration ................................................................................................................. 31 17.1 Overview ..................................................................................................................... 31

17.2 Decision-making process for determining Remuneration Policy ................................ 32 17.3 Information on the link between pay and performance ............................................... 32 17.4 Quantitative information .............................................................................................. 33

Pillar 3 Disclosures 2016 ICBC (London) plc

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1. Overview

1.1 Background

ICBC (London) plc (‘the Bank’), formed in 2003, is a UK-registered bank (4552753) authorised by

the Prudential Regulation Authority (‘PRA’) and regulated by the Financial Conduct Authority

(‘FCA’) and the PRA. The Bank is a wholly-owned subsidiary of Industrial and Commercial Bank of

China Limited(‘ICBC Ltd’ or ‘the Parent Bank’).The Bank is primarily a wholesale bank although it

also offers a range of retail banking services to individuals and small businesses, particularly where

there is a connection to China.

1.2 Regulatory requirements for Pillar 3 disclosures

The Basel framework comprises three complementary pillars, designed to promote market discipline

by providing market participants with key information on a firm’s risk exposures and risk

management processes:

Pillar 1 – sets out the minimum capital requirements for credit, market and operational risk

Pillar 2 – requires firms and supervisors to take a view on whether a firm should hold

additional capital against firm specific risks

Pillar 3 – aims to encourage market discipline by developing a set of disclosure requirements

which will allow market participants to assess key pieces of information on a firm’s capital,

risk exposures, risk assessment process and hence the capital adequacy of the firm.

The European Union implemented the Basel III framework through a new Capital Requirements

Directive and a Capital Requirements Regulation known collectively as ‘CRD IV’. The CRD IV

framework replaced Basel II and introduced a revised definition of capital resources, including

additional capital and disclosure requirements.

The Directive was transposed into UK legislation with the PRA providing additional guidance in its

supervisory statements. The Capital Requirements Regulation (‘CRR’) applies directly to EU

member states, including the UK until such time as it completes its exit from the EU. CRD IV came

into effect on 1 January 2014, although it contains numerous transitional arrangements. The

European Banking Authority (‘EBA’) supplemented this (Level 1) text with detailed technical

standards and guidance (Level 2 and 3) requirements, some of which have yet to be finalized. The

disclosure requirements applicable to CRR firms are set out in Part Eight of the CRR Articles 431 to

455 ‘Disclosure by Institutions.’ The PRA and EBA have also issued Level 2 and 3 regulations

relating specifically to the disclosure requirements in the CRR.

1.3 Scope of disclosure requirements

The disclosures set out in this report have been prepared by ICBC (London) plc in accordance with

the requirements set out in Part Eight of Capital Requirements Regulation. The Bank’s policy is to

meet all required Pillar 3 disclosure requirements as detailed in the CRR and the Level 2 and 3

regulation provided by the PRA and EBA.

The regulatory capital ratios are based solely on ICBC (London) plc’s balance sheet and off-balance

sheet items. Unless otherwise stated, all figures are presented in thousands (‘000) of USD, which is

the reporting currency of ICBC (London) plc. The reporting date is 31 December 2016, the Bank’s

financial year-end.

The disclosures included in this document refer to the Bank’s overall risk management and its

approach to assessing the adequacy of its capital and liquidity.


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1.3.1 Disclosure policy

The Bank has adopted a formal policy, the Pillar 3 Disclosure Policy, to comply with the disclosure

requirements as contained in Article 431 (3) of the CRR and as relevant to the scale of the operations

of ICBC (London) plc. This policy sets out the contents of the Pillar 3 Disclosure document and

includes consideration of whether information is material, proprietary or confidential, the required

frequency of disclosures and their verification.

The Bank annually reviews its policy and disclosures in conjunction with the preparation and

publishing of its annual audited accounts. The latest version of this policy was approved by the

Board on 3 April 2017.

1.4 Non-material, proprietary or confidential information

The Bank does not seek any exemption from the disclosure requirements on the basis of materiality

or on the basis of proprietary or confidential information.

1.5 Scope of application

ICBC (London) plc has no subsidiaries. Industrial and Commercial Bank of China Limited was

granted a banking licence to establish a branch in London in September 2014 (‘ICBC London Branch’

or ‘the Branch’). The information disclosed in this document is solely related to ICBC (London) plc

(‘the Subsidiary’). Therefore, the Branch is outside of the scope of this document. However, all

transactions between the Branch and the Subsidiary are at ‘arm’s length’.

1.6 Basis and frequency of disclosure

This Pillar 3 disclosure document has been approved by the Board on 3 April 2017. The Board has

verified that it is consistent with formal policies adopted regarding its production and validation.

Information in this report has been prepared solely to meet the disclosure requirements under CRD

IV.

These disclosures do not constitute any form of financial statement nor do they constitute any form of

contemporary or forward-looking record or opinion about the business. Unless indicated otherwise,

information contained within this document has not been subject to external audit. However, there is

no material difference between information disclosed in this report and the Annual Report and

Financial Statements. This disclosure document should be read in conjunction with the ICBC

(London) plc Annual Report and Financial Statements for the year ended 31 December 2016.

Disclosure will be made annually and published as soon as practicable after publication of the

Annual Report. ICBC (London) plc will reassess the frequency of disclosure in light of any material

change in its business structure, the approach used for the calculation of capital, or regulatory

requirements.

1.7 Means of disclosure and verification

The Bank’s Pillar 3 Disclosures document has been reviewed by the Board of Directors and approved

on 3 April 2017 and is published on the Bank’s corporate website (www.icbclondon.com).These

disclosures explain how the Bank has calculated its capital requirements and provides information

relating to risk management.

http://www.icbclondon.com/


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2. Governance &risk management framework

2.1 Governance – board and committees

The Board is comprised of two Executive and five Non-Executive Directors (NEDs), of whom two

are independent. Members hold in total five 5directorships outside of the ICBC Group excluding

organisations that do not pursue predominantly commercial objectives. The Board is responsible for:

Development and implementation of an Enterprise-Wide Risk Management strategy in

accordance with the Bank’s risk tolerance

Determining the structure, responsibilities and controls for managing risk

Communicating the risk strategy, key policies for implementing the strategy and the risk

management structure throughout the Bank

Closely monitoring current trends and potential market developments that may present

significant, unprecedented and complex challenges for managing risk, so that they can make

appropriate and timely changes to the risk strategy as needed

Defining the specific procedures and approvals necessary for exceptions to policies and limits,

including the escalation procedures and follow-up actions to be taken in response to a breach of

any limit.

The Bank has a comprehensive recruitment policy in place for NEDs. The policy requires all NEDs

to have a good understanding of their role and responsibilities in addition to a solid background in

banking and the relevant discipline required for the particular role. Candidates must also fulfil the

Bank’s standards set out in the internal Fitness and Propriety Policy. The policy stipulates that local

candidates should be recommended by a reliable source (definition specified in the policy document)

and that candidates appointed by the parent bank need to meet the local standards required of bank

directors. Candidates must also be acceptable to the regulators. The policy outlines the interview

process and the pre-screening measures used for NEDs, including a review of the Financial Services

Register, where applicable.

Executive Board members are appointed by the Parent Bank and approved by the Board. They have a

full understanding of their areas of responsibility and an adequate understanding of those areas of the

business undertaken by the Bank for which they are not directly accountable.

The Board of Directors have established a number of Board-level committees including the Audit

Committee, Governance & Compliance Committee and Risk Committee. The Committees ensure a

very strong focus on risk in the Bank.

The Board has ultimate responsibility for setting the Bank’s strategy, risk appetite and control

framework, and measures performance against targets. It normally meets a minimum of four times a

year. The Board is also responsible for discharging the Bank’s responsibilities under the

Remuneration Code; approving the appointment of senior executives; and agreeing authority levels

and the delegation of authority. To assist it in discharging its responsibilities, the Board has

instituted the high-level committees mentioned above, governed by clear terms of reference.

Controls are regularly tested by the Internal Audit, Risk & ALM (‘Asset &Liability Management’),

Compliance & Legal and Credit Management departments. These departments’ reports are presented

to the Board-level committees.

The Bank’s governance policies are set by the Board and implemented by the management team.

The chart below illustrates the organisation structure of the Bank as at 31 December 2016.


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Chart 1 Management

Audit Committee – Chaired by an Independent Non-Executive Director, members of this

Committee are all Non-Executive directors. The Executive Directors, other Senior Management, the

Head of Financial Control and the Head of Compliance & Legal are invited to attend as observers.

The Head of Internal Audit is secretary to the Committee. The Committee, which normally meets a

minimum of four times a year, is responsible for:

1) Informing the Board of the outcome of the statutory audit and explaining how the statutory

audit contributed to the integrity of financial reporting and what the role of the Audit Committee was

in that process

2) Oversees the financial reporting process and agrees recommendations and proposals to ensure

its integrity

3) Oversees the effectiveness of the firm’s internal quality control and its internal audit

4) Monitors the performance of the statutory audit, taking into account the FRC’s report on the

audit firm (if applicable)

5) Reviews and monitors the independence of the statutory auditor and the scope and cost of the

statutory auditors work

6) Is responsible for the procedure for the selection of the statutory auditor.

The Bank’s external auditors normally attend Audit Committee meetings.

Governance & Compliance Committee– Chaired by a Non-Executive Director, members of this

Committee comprise Non-Executive Directors, the CEO and the Deputy CEO. The Senior Manager

for Risk oversight and the Head of Internal Audit attend as observers. The Head of Compliance &

Legal is secretary to the Committee. The Committee normally meets four times a year and is

responsible for examining all aspects of governance and compliance matters in the Bank, i.e.

ensuring clarity of the relationship between the UK Subsidiary and the UK Branch and reviewing the

organisation structure to ensure it remains fit for purpose. This Committee also monitors the mix of

staff, particularly at management level, between expatriate and locally recruited staff.

Risk Committee – Chaired by an Independent Non-Executive Director, members of this Committee

comprise of Non-Executive Directors, the CEO and the Senior Manager responsible for Risk & ALM.

Other Senior Management and some Heads of Departments are invited to attend as observers. The


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Head of Risk & ALM is secretary to the Committee. The Committee normally meets four times a

year and is responsible for advising the Board on risk management and making recommendations

where action or improvement is required. This Committee also reviews and makes recommendations

on: regulatory, financial, operational and legal risks, other risks such as concentration risk, strategic

risk, political risk, key person risk and reputational risk. It reviews the ICAAP, ILAAP and RRP

providing robust challenge which feeds into the production process of these regulatory documents,

enhancing their quality. In 2016 the Risk Committee met four times.

At the Executive level there are four committees concerned with risk management issues: Executive

Committee, Asset and Liability Committee, Credit Committee and the Financial Crime Risk

Committee.

Executive Committee – Chaired by the CEO, this Committee comprises the Senior Management and

is responsible for the development and implementation of strategy, operational plans, procedures and

budgets. This committee also assumes overall responsibility for the functions of emergency planning

and disaster recovery in the Bank. Department heads are invited to join discussions when relevant.

The Committee meets monthly.

Asset and Liability Committee (‘ALCO’) – Chaired by the Senior Manager for Treasury, this

committee comprises all Senior Management, the Head of Risk & ALM, the Head of Financial

Control, the Deputy Head of the Corporate Banking Department and the Head of Treasury. The

Asset and Liability Committee is set at the executive management level to serve the purpose of

assisting the executive management with the oversight and management of the Bank’s assets and

liabilities; to ensure that business lines are aligned to the Bank’s overall objectives; and to ensure that

all ALM-related risks remain within the risk appetite set by the Board. The Committee meets

quarterly; a sub-committee meets monthly.

Credit Committee – Chaired by the Senior Manager responsible for Credit Management, this

Committee comprises Senior Management, the Head of Risk & ALM, the Head of Treasury, the

Head of Credit Management and the Deputy Head of Corporate Banking. The CEO is not a member

of the Credit Committee, but can, as an Authorised Approver, exercise a veto over Committee

decisions. However, if a credit proposal is declined by the Committee, the CEO cannot overturn that

decision. The Committee is the principal forum below Board level for discussing lending proposals.

Currently, all credit limits must be supported by Credit Committee. The Committee also makes

recommendations on credit policy issues, monitors loan quality, asset mix, possible concentration

risk and makes recommendations on provisions for doubtful loans. The Committee meets weekly.

Financial Crime Risk Committee - Chaired by the CEO, this committee comprises the Deputy

CEO, the Senior Manager responsible for Risk & ALM and Compliance & Legal, the Senior

Management of the front offices, the Head of Compliance & Legal and the Money Laundering

Reporting Officer (‘MLRO’). This committee is responsible for reviewing financial crime risks

including Anti-Money Laundering (AML) risk, Counter Terrorist-Financing (CTF) risk, fraud and

sanctions risk. It also reviews business-critical CDD, AML and CTF issues and assesses the Bank’s

risk appetite in respect of AML, Sanctions, Fraud and Bribery. The Committee meets at least

quarterly.

2.2 Risk management

Since its inception in 2003, the Bank has maintained a strong risk management culture. It has well-

documented procedures; a range of committees to ensure that at least ‘four eyes’ are involved in all

major policy and operating decisions; clear decision-making processes and criteria; an appropriate

degree of segregation of duties in the Bank’s operations; and produces accurate and timely

management information. Risk Reporting is produced by independent risk management functions and


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presented to all relevant stakeholders including the Regulator, the Parent Bank, the Risk Committee,

the ALCO and Senior Management.

The Bank has an independent Internal Audit function with a reporting line to the Chairman of the

Audit Committee. The Internal Audit Department is responsible for carrying out a risk-based

programme of work to ensure that appropriate controls are in place and working effectively in

accordance with the Bank’s policies and with local regulations. The Audit Committee approves an

annual audit plan and receives regular reports on audit work.

On a regular basis, Internal Auditors from the Parent Bank undertake full or partial scope audits of

the Bank.

2.2.1 Risk governance

Every member of staff has some responsibility for risk management.

Board and Senior Management

The Board is responsible for overseeing Senior Management and for establishing sound business

practices and strategic plans, setting the risk appetite and risk tolerance. The Board has ultimate

responsibility for Enterprise-Wide Risk Management.

The Board, or a Board-level Committee, approves:

Strategies, policies, processes and systems relating to the management of Enterprise-Wide risk.

The Board, or a Board-level Committee, reviews regularly (and not less frequently than annually):

Risk reports

Assumptions, scenarios and the results of stress testing

Regulatory documents, including the ICAAP, ILAAP, Recovery Plan, Resolution Pack and

Pillar 3 disclosures

Quarterly Management Pack

Policy Documents.

A number of committees have been established to oversee and control risk as detailed in the previous

section.

The Executive Directors have a full understanding of their areas of responsibility and an adequate

understanding of those areas of business undertaken by the Bank for which they are not directly

accountable.

Senior Management is responsible for:

Development and implementation of Enterprise-Wide Risk Management strategy in accordance

with the Bank’s risk tolerance

Determining the structure, responsibilities and controls for managing risk

Communicating the risk strategy, key policies for implementing the strategy and the risk

management structure throughout the Bank

Closely monitoring current trends and potential market developments that may present

significant, unprecedented and complex challenges for managing risk, so that they can make

appropriate and timely changes to the risk strategy as needed

Defining the specific procedures and approvals necessary for exceptions to policies and limits,

including the escalation procedures and follow-up actions to be taken in response to breaches of

limits.


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The Three Lines of Defence Model

The Bank has adopted the Three Lines of Defence Model to enhance the understanding of risk

management and control by clarifying roles and duties. The underlying premise is that, under the

oversight and direction of Senior Management and the Board of Directors, three separate lines within

the Bank are necessary for effective management of risk and control.

The First Line of Defence lies with the business and process owners whose activities create risks.

The First Line owns the risk and the design and execution of the organisation’s controls to respond to

those risks. The first line of defence embeds the principle of a 4 eyes review; that the work of the

originator is reviewed by another person in the department. The Second Line is in place to support

management and provide oversight by bringing expertise, to help ensure that risks and controls are

effectively managed. For all key matters, and in line with the Senior Manager’s Regime, a Senior

Manager is assigned and has responsibility for the accuracy and appropriateness of the work or

project. The Third Line provides assurance to Senior Management and the Board over both the First

and Second Lines’ efforts consistent with the expectations of the Board of Directors and Senior

Management. This is provided by the Internal Audit function. The Internal Audit function is

responsible, inter alia, for providing an independent assessment and assurance that key controls and

governance processes are functioning effectively and are appropriate to monitor, manage and

mitigate the risks inherent in the business.

The Bank has established independent risk management functions (Risk & ALM Department, Credit

Management Department, Compliance & Legal Department) under the direct responsibility of Senior

Management. These departments in the Second Line of Defence help to build a risk awareness

culture in the organisation by keeping up-to-date with current risk management theory and practice

and disseminating information throughout the organisation. The Second Line of Defence functions

report on these matters to the Risk Committee and the Governance &Compliance Committee with a

frequency agreed by the Committee. All Second Line functions report to a Senior Manager

independent of the First Line of Defence.

2.2.2 Risk Policy and Procedure

The Bank’s overall risk policy is commensurate with its business strategy. It is regularly reassessed

and revised to ensure that it remains appropriate. The Bank has an Enterprise Wide Risk

Management framework that sets out the bank’s risk profile based on inherent and residual risk. The

Bank has a Risk Appetite Policy that sets out its overall risk tolerance for each category of risk,

which is further broken down by business line. The policy includes qualitative and quantitative limits

which define the risk tolerance and early warning indicators to help monitor the level of risk. The

policy is approved by the Board’s Risk Committee.

The Bank adopts a cautious and prudent approach to the management of risk and, at all times, seeks

to eliminate unnecessary risks and minimise losses from avoidable risks. In adopting this approach to

the management of risk, the Bank also considers the costs involved and seeks to minimise risk in a

cost-effective manner.

3. Capital Resources

3.1. Total Capital Available

The initial capital of ICBC (London) plc was $100 million when it was formed in 2003. This Tier 1

capital was increased to $200 million in October 2007. On 28/10/2013, a contract for a 10-year

subordinated loan was signed between ICBC Ltd and the Bank. This replaced the previous 5-year

subordinated loan with ICBC Ltd from 22/2/2010, which had the same notional value of $100 million.


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On 29 December 2016, the Bank amended its subordinated loan agreement; no changes were made to

the substance of the loan.

Throughout 2016, the Bank complied fully with its Capital Requirements. The Bank’s capital as of

31 December 2016 is detailed below.

Table 1 – Own Funds

USD in ‘000

Particular 2016

USD in '000

2015

USD in '000

Paid up capital 200,000 200,000

Retained earnings 177,359 156,551

Available for sale reserve 688 724

Common Equity Tier 1 Capital 378,047 357,275

Regulatory adjustment* (563) -

Common Equity Tier 1 Capital 377,484 357,275

Additional Tier 1 Capital - -

Tier 1 Capital 377,484 357,275

Subordinated debt 100,000 100,000

Collective Loan Impairment 2,020 2,079

Tier 2 Capital 102,020 102,079

Total Capital 479,504 459,354

Total risk weighted assets 1,777,358 1,953,629

Capital Ratio

Common Equity Tier 1 ratio (%) 21.24% 18.29%

Tier 1 Capital ratio (%) 21.24% 18.29%

Total Capital ratio (%) 26.98% 23.51%

* Refers to a ‘prudent valuation’ deduction applied to all assets measured at fair value in accordance with

Article 105 of the CRR.

The subordinated loan of $100 million qualifies as lower Tier 2 capital and is subject to amortisation on a

straight line basis from 2018.

Table 2 - Reconciliation between Regulatory Own Funds and Audited Financial Statements as of 31

December 2016

USD in ‘000

Particular

Audited

financial

statements

Regulatory

own fund

Regulatory

adjustment

Paid up capital 200,000 200,000 -

Retained earnings 177,359 177,359 -

Available for sale reserve 688 688 -

Common Equity Tier 1 capital 378,047 378,047 -

Regulatory Adjustment - (563) 563

Common Equity Tier 1 capital 378,047 377,484 563

Tier 1 Capital 378,047 377,484 563

Subordinated debt 100,000 100,000 -

General credit risk adjustments* 2,020 2,020 -


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Tier 2 Capital 102,020 102,020 -

Total Capital 480,067 479,504 563

*Also known as collective provisions.

Table 3 – Capital Instruments Main Features

Share capital

Subordinated

debt

1 Issuer

ICBC (London)

Plc

ICBC (London)

Plc

2 Unique identifier N/A N/A

3 Governing law(s) of the instrument English English

Regulatory treatment

4 Transitional CRR Rules CET 1 Tier 2

5 Post- Transitional CRR Rules CET 1 Tier 2

6

Eligible at solo/(sub-) consolidated/ solo and (sub-)

consolidated solo solo

7 Instrument type Share capital Subordinated debt

8 Amount recognized in regulatory capital USD 200,000,000 USD 100,000,000

9 Nominal amount of instrument USD 200,000,000 USD 100,000,000

9a Issue price 1 USD 100,000,000

9b Redemption price 1 USD 100,000,000

10 Accounting classification

Shareholder’s

equity

Liability-

Amortized cost

11 Original date of issuance*

19/05/2003 and

01/10/2007 28/10/2013

12 Perpetual or dated N/A Dated

13 Original maturity date N/A 27/10/2023

14 Issuer call subject to prior supervisory approval No No

15

Optional call date, contingent call dates and

redemption amount N/A N/A

16 Subsequent call dates, if applicable N/A N/A

Coupons/dividend

17 Fixed or floating coupon N/A Floating

18 Coupon rate and any related index N/A Libor + 1.3 %

19 Existence of dividend stopper No No

20a

Fully discretionary, partially discretionary or

mandatory (in terms of timing) Fully Discretionary Mandatory

20b

Fully discretionary, partially discretionary or

mandatory (in terms of amount) Fully Discretionary Mandatory

21 Existence of step up or other incentive to redeem No No

22 Noncumulative or cumulative N/A N/A

23 Convertible or non-convertible N/A Non- Convertible

30 Write-down features No No

35

Position in subordination hierarchy in Liquidation

( specify instrument type immediately senior to

instrument) N/A N/A

36 Non-compliant transitioned features No No

37 If yes, specify non-compliant features N/A N/A

*The bank issued USD 100 million Common Shares at each issuance.


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Table 4 - Transitional own funds disclosure template

Particular

Amount at

Disclosure

Date

Transitional

Adjustment

End Point

CRD IV

Common Equity Tier 1 (CET 1) capital: Instruments and

reserves

Capital Instruments and the related share premium accounts 200,000 - 200,000

of which: Instrument Type 1

Retained Earning 177,359 - 177,359

Available for Sale Reserve 688 - 688

Common Equity Tier 1 (CET 1) capital before regulatory

adjustment 378,047 - 378,047

Common Equity Tier 1 Capital: Regulatory Adjustment -

Additional Value Adjustments (563) - (563)

Total regulatory adjustments to Common Equity Tier 1

(CET 1) (563) (563)

Common Equity Tier 1 (CET 1) capital 377,484 - 377,484

Additional Tier 1 Capital: Instruments

Tier 1 Capital 377,484 - 377,484

Tier 2 Capital: Instruments and provisions

Capital Instruments and the related share premium accounts

100,000 - 100,000

General credit risk adjustments

2,020 - 2,020

Tier 2 Capital

102,020 - 102,020

Total Capital ( Tier 1 + Tier 2 )

479,504 - 479,504

Total Risk Weighted Assets

1,777,358 - 1,777,358

Capital Ratios and Buffers

Common Equity Tier 1 Ratio (%) 21.24% - 21.24%

Tier 1 Capital Ratio (%) 21.24% - 21.24%

Total Capital Ratio (%) 26.98% - 26.98%

Institution specific buffer requirement 5.15% 1.88% 7.03%

of which capital conservation buffer requirement 0.625% 1.88% 2.50%

of which countercyclical buffer requirement 0.0267% - 0.0267%

CET 1 available to meet buffers 21.24% - 21.24%

4. Capital Requirements

The Board of Directors has the ultimate responsibility for capital management. The Board has

delegated responsibility for day to day capital management and risk management to the ALCO. The

CEO is responsible for the management of the allocation and maintenance of the Bank’s capital. The

Bank’s capital is monitored on a daily basis and reported in management information produced by

the Financial Control department which is sent to the Senior Management team to be reported to the

Executive Committee when major decisions are taken.

The Bank has adopted the Standardised approaches to calculate credit and market risk, the Mark-to-

market approach for counterparty credit risk and the Basic Indicator Approach (‘BIA’) to operational

risk for the purpose of calculating the Pillar 1 capital requirement.


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The Bank produces an ICAAP annually, based upon the year-end results. The ICAAP includes an

assessment of the Bank’s capital needs based upon the minimum regulatory requirements and

additional capital charges that the Bank deems prudent to include. These additional capital charges take account of factors such as: the current quality of the credit book; the risks associated with any

concentrations in particular geographical areas or industry sectors; risks identified from stress testing

and scenario analysis, particularly in the area of treasury products; risks associated with the Bank’s

view of how potential economic changes might affect the banking industry or its customers; and

capital charges for planned new business projects.

The process also includes an analysis of the Pillar 2 capital that would be required under both

stressed and unstressed conditions and includes appropriate “add-ons” to required capital to reflect

Pillar 2 risks.

The minimum amount of regulatory capital required is determined in accordance with the relevant

rules and the Individual Capital Guidance (“ICG”) received from the PRA.

The breakdown of the Pillar 1 minimum capital requirement (8%) for the Bank, as at 31 December

2016, is set out in Table 5 below:

Table 5 – Minimum Capital Requirements (Pillar 1)

USD in ‘000

Exposure class

2016 2015

Risk-weighted

assets

Minimum

capital

requirement

(8%)

Risk-

weighted

assets

Minimum

capital

requirement

(8%)

Credit and Counterparty credit

risk

Central governments or central banks - - - -

Multilateral Development Banks

(“MDBs”) - - - -

Institutions 356,013 28,481 165,754 13,260

Corporates 1,149,576 91,966 1,368,873 109,510

Secured by mortgage on immovable

properties 82,946 6,636 110,775 8,862

Exposure in default 15,000 1,200 27,000 2,160

Institutions and corporates with a

short-term

credit assessment

- - 83,975 6,718

Other items 37,346 2,988 55,278 4,422

Total Credit Risk 1,640,881 131,271 1,811,655 144,932

Operational risk 127,677 10,214 107,701 8,616

Market risk (Position risk) 243 19 90 7

Credit valuation adjustment 8,557 685 34,183 2,735

Grand Total 1,777,359 142,189 1,953,629 156,290

Total capital resources available

479,504

459,354

Headroom over minimum capital

requirement

337,315

303,063

It is the Bank’s policy to maintain a prudent degree of headroom above the minimum required capital

level. The level of capital is monitored daily against an internal early warning limit set by the Bank.


12 | P a g e

5. Capital Buffers

Table 6 - Geographical distribution of credit exposures relevant for the calculation of the countercyclical

capital buffer

USD in ‘000

General

credit

exposures

Trading

book

exposure

Own funds requirements

Own funds

requirement

weights

Countercyclical

capital buffer

rate

of

wh

ich

:

Gen

era

l cre

dit

exp

osu

res

of

wh

ich

:

Tra

din

g b

oo

k

exp

osu

res

To

tal

Cayman Islands 40,665 - 3,253 - 3,253 0.02 -

China 319,229 - 10,705 - 10,705 0.08 -

Cyprus 20,014 - 2,402 - 2,402 0.02 -

Denmark 47 - 1 - 1 0.00 -

Egypt 14,069 - 563 - 563 0.00 -

France 86,613 - 4,349 - 4,349 0.03 -

Germany 60,046 - 961 - 961 0.01 -

Guernsey 21,131 - 1,690 - 1,690 0.01 -

Hong Kong 31,255 - 2,325 - 2,325 0.02 0.625%

Japan 45 - 1 - 1 0.00 -

Jersey 4,519 - 362 - 362 0.00 -

Luxembourg 101,951 - 4,242 - 4,242 0.03 -

Netherlands 109,795 - 8,784 - 8,784 0.07 -

Norway 33 - 1 - 1 0.00 1.50%

Russia 65,482 - 5,239 - 5,239 0.04 -

Singapore 1,841 - 147 - 147 0.00 -

South Africa 200,209 - 7,955 - 7,955 0.06 -

Sweden 17,129 - 1,370 - 1,370 0.01 1.50%

Switzerland 18,519 - 741 - 741 0.01 -

Turkey 49,712 - 1,988 - 1,988 0.02 -

United Kingdom 1,011,523 1,349 64,124 19 64,143 0.49 -

United states 380,671 - 2,361 - 2,361 0.02 -

Zambia 96,344 - 7,707 - 7,707 0.06 -

Other

Countries** 79,932 - - - - - -

Total 2,730,774 1,349 131,271 19 131,290 1.00

* Since the exposure on trading book is less than 2% of aggregate risk weighted exposures, all trading book

exposures are allocated to the UK.

** Other countries include exposures to multilateral development banks.

Table 7- Amount of institution-specific countercyclical capital buffer

USD in '000

Total risk exposure amount 1,641,125

Institution specific countercyclical buffer rate 0.0267%

Institution specific countercyclical buffer requirement 439


13 | P a g e

6. Leverage The Leverage Ratio measures the relationship between the capital resources of the Bank and its total

assets, as well as certain off balance sheet exposures. The Financial Policy Committee of the Bank of

England (FPC) intends to conduct a review of the Leverage Ratio in 2017 with a view to introducing

a minimum requirement for all UK banks and building societies from 1 January 2018.The

requirement to meet the Leverage ratio is already in place for major UK banks and building societies

and comprises a minimum requirement of 3% with additional leverage buffer components.

The Leverage Ratio of the Bank as at 31 December 2016 was 12.79%. There is currently no

minimum leverage ratio requirement for the Bank. The fully phased-in Tier 1 Capital approach has

been adopted in order to calculate the Leverage Ratio.

Table 8- Summary reconciliation of accounting assets and leverage ratio exposures

USD in ‘000

Total assets as per published financial statements 2,722,265

Adjustments for derivative financial instruments 53,974

Adjustment for securities financing transactions (SFTs) -

Adjustment for off-balance sheet items (i.e. conversion to credit equivalent

amounts of off-balance sheet exposures) 171,808

Other adjustments 3,190

Leverage ratio total exposure measure 2,951,237

Table 9- Leverage ratio common disclosure

USD in ‘000

On-balance sheet exposures (excluding derivatives and SFTs)

On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but

including collateral) 2,637,956

(Asset amounts deducted in determining Tier 1 capital) -

Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary

assets) 2,637,956

Derivative exposures

Replacement cost associated with all derivatives transactions (i.e. net of eligible

cash variation margin) 87,499

Add-on amounts for PFE associated with all derivatives transactions (mark- to-

market method) 53,974

Total derivatives exposures 141,473

Other off-balance sheet exposures

Off-balance sheet exposures at gross notional amount 390,257

(Adjustments for conversion to credit equivalent amounts) (218,449)

Other off-balance sheet exposures 171,808

Capital and total exposure measure

Tier 1 capital 377,484

Leverage ratio total exposure measure (sum of lines 3, 11, 16, 19, EU-19a and

EU-19b) 2,951,237

Leverage Ratio

Leverage Ratio 12.79%


14 | P a g e

Choice on transitional arrangements and amount of derecognised fiduciary

items

Choice on transitional arrangements for the definition of the capital measure

Fully phased in

Tier 1 Capital

Table 10- Split-up of on-balance sheet exposures (excluding derivatives, SFTs and exempted

exposures)

Total on-balance sheet exposures (excluding derivatives, SFTs, and

exempted exposures), of which: 2,637,956

Exposures treated as sovereigns 280,878

Exposures to regional governments, MDB, international organisations and PSE

not treated as sovereigns 79,932

Institutions 1,201,716

Secured by mortgages of immovable properties 82,946

Retail exposures -

Corporate 940,138

Exposures in default 15,000

Other exposures (e.g. equity, securitisations, and other non-credit obligation

assets) 37,346

6.1 Risk statement for leverage

The risk of excessive leverage is considered to be a low risk for the Bank. With regard to its risk

profile and strategy, the Bank concludes that the leverage risk management systems put in place are

adequate.

7. Asset Encumbrance

Asset encumbrance is the process by which assets are pledged as collateral in order to secure funding

or credit-enhance a financial transaction from which they cannot be freely withdrawn. The Bank

undertakes certain financial transactions such as repurchase agreements and derivatives that can

result in certain assets being encumbered as at year end.

The Bank is not required to report on Template B collateral received as per the threshold criteria set

out in PRA supervisory statement SS11/14 (CRD IV: Compliance with the European Banking

Authority’s Guidelines on the disclosure of encumbered and unencumbered assets). As required by

the EBA Guidelines, the data is presented as a median calculation for 2016 rather than at a point in

time.


15 | P a g e

Table 11 Template A- Assets

USD in ‘000

Carrying

amount of

encumbered

assets

Fair value of

encumbered

assets

Carrying

amount of

unencumbered

assets

Fair value of

unencumbered

assets

010 040 060 090

010

Assets of the

reporting

institution

173

2,880,385

030 Equity instruments - - - -

040 Debt securities - - 418,216 418,216

120 Other assets 173

125,990

Table 12 Template C-Encumbered assets/collateral received and associated liabilities

USD in ‘000

Matching

liabilities,

contingent

liabilities or

securities lent

Assets, collateral

received and own

debt securities

issued other than

covered bonds and

ABSs encumbered

010 030

010 Carrying amount of selected financial liabilities 412 -

These asset encumbrance disclosures are prepared on a regulatory basis and as such will differ to the

asset encumbrance disclosures presented in the Annual Report and Financial Statements.

As at 31 December 2016, the amount of encumbered assets was USD 173,000. This reflects initial

margin deposited with a central counterparty in 2016 for the clearing of derivatives.

7.1 Risk statement for asset encumbrance

The risk of asset encumbrance is considered to be a low risk for the Bank. With regard to its risk

profile and strategy, the Bank concludes that the asset encumbrance risk management systems put in

place are adequate.

8. Credit risk

8.1 Credit risk management objectives and policies

Credit risk exposes the Bank to losses caused by financial or other issues experienced by its clients.

Credit risk is defined as the risk arising from an obligor’s (typically a company, financial institution

or issuer of financial instrument) failure to meet the terms of any agreement and obligations. Credit

risk arises when funds are extended, committed, invested or otherwise exposed through contractual

agreements, whether reflected on-or off-balance sheet. Credit and credit counterparty risk arises

primarily from three types of transactions:

Lending transactions through loans and advances to clients and counterparties creates the risk

that an obligor will be unable or unwilling to repay capital and/or interest on loans and advances


16 | P a g e

granted to them. This category also includes money market loans, where funds have been placed

with other financial institutions

Issuer risk on financial instruments where payments due from the issuer of a financial instrument

will not be received

Trading transactions, giving rise to settlement risk.

ICBC (London) plc places strong emphasis on credit risk management and recognises it as a key risk

in the operation of the Bank. Default triggers a total or partial loss of money lent to a counterparty

and the main objective is to avoid and minimise such losses. The Bank has put in place procedures,

detailed in the Credit Policy, Credit Manual and Risk Appetite policy to manage and strengthen

credit risk management.

8.2 Strategies and processes to manage credit risk

The Bank has a clear strategy of target markets. Although Europe, the UK and China are its key

markets, the Bank periodically accepts credit exposures in other geographical locations such as North

America (USA) and Africa, in line with the Parent Bank’s cross border lending policy and

procedures. The cross border policy and procedures ensure that there is mutual and close cooperation

between the domestic entities of ICBC Ltd where the borrower is located and the overseas entities of

ICBC Ltd that are taking credit exposures to the borrower located in that jurisdiction.

Counterparty credit risk is assessed using quantitative and qualitative analysis, as articulated in the

Bank’s Credit Policy, Credit Manual and other documents. The assessment of client profiles includes

consideration of their character and integrity, core competencies, track record and financial strength.

A strong emphasis is placed on the historic and on-going stability of income and cash flow streams

generated by the clients. The Bank’s primary assessment method is therefore the ability of the client

to meet their payment obligations.

The Bank is exposed to credit risk in its on- and off-balance sheet activities and daily settlements.

The Bank manages credit risk by establishing individual counterparty limits, industry sector limits

and country limits for counterparties with which it undertakes business within the terms of the

Bank’s credit policies and procedures. A credit analysis is performed on all new and existing

counterparties and related credit exposures to assess the counterparty’s ability to repay and meet its

obligations. This analysis is undertaken by Credit Analysts within Credit Management Department.

The Bank uses two External Credit Assessment Institutions (‘ECAIs’) namely Standard & Poor’s (‘S

& P’) and Fitch for evaluating credit risk and building counterparty risk profiles for all exposure

classes.

The Bank also employs the Parent Bank’s internal rating system, located within the Global Credit

Management System (‘GCMS’), to grade entities that are not rated by the external credit agencies

and to facilitate monitoring of asset quality at portfolio as well as counterparty level. The rating model focuses mainly on quantitative data and financial ratios and a rating is generated and assigned

based on ICBC Group methodology.

8.3 Structure and organisation of the credit risk function

The Relationship Managers (Corporate Banking and Institutional Banking Departments) and Traders

(Treasury Department) are the originators of businesses and transactions, which are then examined

and assessed independently by the Credit Analysts. After an evaluation and assessment of risks, the

Credit Analysts make their recommendations and present the credit applications to the Credit

Committee for consideration and approval. Relationship Managers and traders operate within these

limits. The Board of Directors and Senior Management of the Bank are ultimately responsible for

credit risk and overall risk management.


17 | P a g e

Approvals are granted according to the Annual Operation and Management Authorisation and Credit

Policy of the Bank, with a documented hierarchy. The Bank also undertakes annual reviews of loans

and assets in the bond portfolio to monitor and assess the quality of the overall portfolio. Asset

quality of the overall portfolio is monitored and the results of the analysis are reviewed by the Credit

Committee and Risk Committee on a quarterly basis.

It is the Bank’s policy and practice that credit limits for counterparties are reviewed at least annually

and limits are then approved by the Credit Committee and the Authorised Approver.

Post-lending management: Monitoring of credit exposures against approved limits for

counterparties, industries and countries on a regular basis is a key function of post-lending

management to maintain a healthy loan portfolio. Requests for waivers and amendments of existing

credit facilities, where it is judged that their approval will result in higher credit risk than when the

deal was originally sanctioned, are submitted to Credit Committee and the Authorised Approver.

The Bank documents and maintains a record either in forms of credit proposals or memoranda of all

counterparties for whom forbearance is applied, and material waiver requests are taken into account

in the categorisation of asset quality. Financial covenants are monitored by Credit Analysts to ensure

their compliance.

8.4 Measurement and reporting of credit risk

The asset book comprises mainly syndicated and bilateral loans to corporates and banks. There is

also an active portfolio of trade finance deals, normally of short tenor, involving discounting and re-

financing of letters of credit issued by banks in emerging-market as well as developed countries. The

Bank also undertakes structured commodity trade finance for selected counterparties and

Commercial real estate lending. Commercial real estate loan transactions are supported by first

legal mortgages or charges over property. The following characteristics of the property are

considered: the type of property, its location, tenant mix, sponsor and the ease with which the

property could be re-let and/or re-sold. Commercial real estate lending generally takes the form of

good quality property underpinned by strong third party leases. However, the primary consideration

in all cases is debt serviceability. The Bank’s exposure to the property market is well diversified,

with a strong bias towards prime locations and focus on quality of tenants for commercial assets.

The loan-to-value ratio, interest cover ratio and debt service ratio are key parameters set to assess

risks in commercial real estate lending. All of the Bank’s commercial real estate transactions are

located in the UK and subjected to a strict underwriting process.

The Bank issues guarantees and stand-by letters of credit on an ad hoc basis, where the counterparty

in the UK or Europe has a business interest in China. The Bank adds its confirmation to letters of

credit and undertakes participation risks, on a funded or unfunded basis, in relation to trade finance

transactions. The Bank has a small number of MiFID investment products; these are predominantly

OTC derivatives including FX and Interest Rate Swaps (‘IRS’).

Credit limits are established for all transactions which give rise to credit risk. In the case of loans and

advances, the amount at risk is the maximum exposure less any collateral and realisable assets in the

event of default. In the case of bond investment, the exposure at risk is the maximum amount of the

debt related to issuer risk of the financial instrument where payments due from the issuer will not be

received in the event of default. Financial instruments are marked to market and any impairment or

gains are adjusted through the Profit and loss account, categorised as ‘financial instruments available

for sale’.


18 | P a g e

Table 13 below shows the gross credit risk exposures on 31 December 2016 and the average

exposures during 2016. Both measures of exposure value are shown before the application of credit

risk mitigation techniques or ‘CRM’.

Table 13 –Gross and Average Exposures by Exposure Class

Units in ‘000 USD

Table 14 summarises loans and advances to banks and corporates and financial investments by

geographical area.

The Bank manages concentration risk by counterparty, industry sector and country. The Bank has

geographical risk concentration in Europe (mainly the UK) and in China, reflecting its business focus.

North American exposures are mainly in the USA, the largest of which are US Treasury investments

held as High Quality Liquid Assets (‘HQLA’). African exposures are mainly to banks in South

Africa and African multi-lateral development institutions.

Table 14 – Exposure Class by Geographic Distribution

Units in ‘000 USD

Exposure

class

Asia and

Pacific

Europe Middle

East

North

America

South

America

Africa Total

Central

governments or

central banks

25,695

255,183

280,878

Multilateral

Development

Banks

10,036

-

49,824

20,072

79,932

Institutions

452,582

488,995

139,969

255,619

1,337,165

Corporates

65,250

896,532

46,184

-

110,004

1,117,969

Secured by

Mortgage on

immovable

properties

82,946

82,946

Exposure class Average Gross

Exposures during

2016

Gross

exposures

as at 31

December

2016

Central governments or central banks

283,504

280,879


133,863

79,932

Institutions

1,469,239

1,337,165

Corporates

1,561,953

1,117,969

Secured by Mortgage on immovable properties

107,335

82,946

Exposure at Default

17,400

15,000

Other Items

47,942

37,346

Total 3,621,236 2,951,237


19 | P a g e

Exposure at

Default

15,000

-

15,000

Other Items

37,346

37,346

Total

517,832

1,556,550

-

491,160

-

385,695

2,951,237

Table 15 summarises credit exposures by industry. For the reporting period ending 31 December

2016, 45% of credit exposures related to financial institutions, 5.2% to commodity trading companies,

6.9% to mining companies and 4.4% to manufacturing industry. Overall the asset portfolio reflects a

good diversification of industries as the Bank lends across a broad range of industry segments.

Table 15 – Industry type by Exposure Class

Units in ‘000 USD

Exposure class Industry Gross exposure

Central governments or central banks Sovereign 280,878

Multilateral Development Banks 79,932


Corporates Commodity Trading 152,391

Manufacturing Industry 130,224

Mining 202,987

Oil & Gas 40,665

Utilities 24,841

Food & Beverage 95,749

Wholeasale & Retail 94,667

Telecommunication 128

Transportation 8,231

Aircraft Financing 67,746

Others 300,341

Subtotal 1,117,969

Secured by Mortgage on immovable

properties

Commercial real estate 82,946

Exposure at Default Mining and oil & gas 15,000

Other Items 37,346

Total 2,951,237

Note: The Bank has no exposures to SMEs.

Exposure at Default in the oil and gas and mining industries refers to two corporate loans with gross

exposure of $30 million and a specific impairment provisions totalling $15 million made against the

loans.


20 | P a g e

Maturity profile of loans

The Bank’s exposures on 31 December 2016 by maturity dates and time horizons are shown in Table

16 below.

Table 16 – Residual Maturity by Exposure Class

Units in ‘000 USD

Exposure class 0-3

months

3 months – 1

year

1-5 years Over 5

years

Total

Central governments or

central banks

27,496

60,178

193,204

-

280,879

Multilateral Development

Banks

30,108

19,893

29,931

-

79,932

Institutions

900,396

180,336

201,432

55,000

1,337,165

Corporates

68,646

212,759.88

711,024.65

125,539

1,117,969

Secured by Mortgage on

immovable properties

-

-

69,120

13,826

82,946

Exposure at Default

-

15,000

-

-

15,000

Other Items

37,346

-

-

-

37,346

Total

1,063,992

488,168

1,204,712

194,365

2,951,237

9. Credit risk mitigation

9.1 Policies, strategies and processes for hedging, mitigating and monitoring credit

risk

ICBC (London) plc considers credit risk mitigation techniques as part of the credit assessment of a

potential client or business proposal and not as a separate consideration of mitigation of risk. Credit

risk mitigants include any collateral item over which the Bank has a pledge of security, first legal

charges over property, netting agreements, cash, or terms and conditions imposed on a borrower with

the aim of reducing the credit risk inherent to that transaction.

The Bank has adopted a number of techniques to mitigate credit risk. The Bank takes collateral

whenever the need arises. The valuation of collateral is updated on a regular basis and increases in

frequency when the credit risk of a counterparty begins to deteriorate. The types of credit risk

mitigation employed by the Bank are listed below.

Netting Agreement: ICBC (London) plc has entered into a (‘Netting Agreement’) for on-

Balance sheet netting with its Parent Bank (ICBC Ltd). The Netting Agreement restricts on-

balance sheet netting to mutual claims between an institution and its counterparty. It is compliant

with CRR Regulation EU NO 575/2013 and is treated as funded credit protection for those loans

and deposits which are denominated in the same currency, meaning that ICBC (London) plc is

entitled to set off GBP loans against GBP deposits, USD Loans against USD deposits, Euro loans

against Euro deposits and CNY loans against CNY deposits. The Netting Agreement also

mitigates the concentration risk arising from large exposures ensuring the Bank’s net exposure to

ICBC Group is maintained within the regulatory large exposure threshold.

Guarantees and stand-by letters of credit: The Bank also participates in lending activities

against the support and collateral of guarantees and stand-by letters of credit. In such cases the

Bank regards its credit risk as being to guarantee providers rather than the underlying borrower.

The Bank uses strong investment-grade guarantors, including corporates and international


21 | P a g e

financial organisations rated ‘A’ or above by Fitch and Standard & Poor’s. The Bank also uses

guarantees from strong and reputable insurance companies to support credit facilities extended to

corporate clients.

Lending collateralised by property: The Bank’s commercial real estate lending in UK is

collateralised by mortgages or charges over the property. Other considerations such as the loan-

to-value ratio, debt service ratio and interest cover ratio, as set out in the Bank’s policy and

guidelines for this sector, are taken into account. Commercial real estate lending generally takes

the form of good quality property often underpinned by strong third party leases. Valuations on

commercial properties in the portfolio are an intrinsic part of the Bank’s on-going focus on

collateral management and assessment.

Cash collateral: This type of collateral and risk mitigation is insignificant in the Bank’s loan

portfolio.

Risk Participation Agreements: the Bank uses industry standard Risk Participation Agreements

to mitigate credit risk. Some of the risk participation agreements are either on a funded or

unfunded basis.

Table 17 – Exposures before and after CRM by Exposure Class

Units in ‘000 USD

Exposure class Gross exposure

(before CRM)

Gross exposure

(after CRM)

Central governments or central banks 280,879 280,879

Multilateral Development Banks 79,932 79,932

Institutions 1,337,165 1,116,703

Corporates 1,117,969 1,117,969

Secured by Mortgage on immovable properties 82,946 82,946

Exposure at Default 15,000 15,000

Other Items 37,346 37,346

Total 2,951,237 2,730,775

9.2 Risk Statement for Credit risk

Credit risk is considered to be a medium risk for the bank. Credit risks are managed prudently with

proper controls in place in the form of a Risk Appetite Policy and key indicators such as the NPL

(Non-Performing Loan) ratio and the counterparty ratings floor. These act to complement various

credit policies and procedures that govern the entire credit lending process. The Bank is prepared to

accept low-to-medium risk in order to enhance returns. The Bank’s growth strategy is moderate with

higher long term returns, as opposed to an aggressive approach. Generally the Bank takes a

conservative approach to credit risk management which is evident in the low NPL ratio of 1%, as at

31 December 2016. With regard to its credit risk profile and strategy, the Bank concludes that the

credit risk management systems and controls put in place are adequate.

10. Use of external credit assessment institutions

The Bank uses the following external credit assessment institutions (‘ECAIs’) for credit risk and

counterparty credit risk calculations purposes throughout the reporting period:

Standard & Poor’s (‘S&P’)

Fitch


22 | P a g e

Table 18 below shows that the gross exposure amount as at 31 December 2016 subject to the use of

ECAIs was $1,836 million. The exposures include both on- and off-balance sheet items. In the case

of off-balance sheet exposures, the Bank applies a Credit Conversion Factor (‘CCF’) as prescribed

under CRD IV for using the Standardised Approach to credit risk.

Table 19 below shows exposures after credit risk mitigation (CRM). As at 31 December 2016, 57%

of assets were risk weighted under Credit Quality Steps 1 to 3. Credit Quality Steps (‘CQS’) 1-3

represent investment grades AAA to BBB- of S&P and Fitch. Approximately 39% of the Bank’s

assets, mainly corporates and commercial real estate exposures, are unrated although asset quality is

good. The Bank considers the asset quality of its unrated counterparties to be good on the basis of

their financial standing, credit profiles and low probability of default- underpinned by well-structured

credit and an identified source of repayment. Exposures subject to the use of ECAIs are marketable

with the exception of two impaired assets highlighted in table 21 below.

Table 18 - Exposure amounts subjected to the use of ECAIs

Units in ‘000 USD

Exposure class Gross Exposure

Central governments or central banks 280,878

Multilateral Development Banks 79,932


Corporates 239,438

Total 1,835,880

Table 19 – Exposures amounts by CQS

Units in ‘000 USD

Credit Quality Step (CQS) Gross Exposure Exposure after

CRM

1 479,051 479,051

2 546,397 325,935

3 600,785 600,785

4 105,915 105,915

5 56,591 56,591

6 47,141 47,141

Total 1,835,880 1,615,418

11. Exposures to Counterparty Credit Risk (‘CCR’)

Derivative instruments are used to hedge exposures to interest rate risk in the Banking Book and

foreign exchange risks (market risk). Counterparty credit risk is the risk that a counterparty to a

derivative instrument could default prior to the maturity of the contract. Counterparty credit

exposures are subject to credit limits on the same basis as other credit exposures. Counterparty credit

exposure is measured using the CCR Mark-to-Market method.

The Bank has limited wrong-way risk exposure. Wrong way risk exposures arise when the likelihood

of default by counterparties is positively correlated with general market risk factors or when the

future exposure to a specific counterparty is positively correlated with the counterparty’s probability

of default due to the nature of the transaction.

In 2016, collateral was not received or placed by corporate clients for derivative contracts. However,

the EMIR clearing obligation which came into effect on 21 December 2016 means that eligible

contracts are now cleared through a CCP. Additional EMIR rules, which came into effect on 1 March

2017, require the exchange of variation margin with all covered counterparties, meaning collateral is

likely to be exchanged directly with clients in the year ahead.


23 | P a g e

The Bank does not use credit default swaps as protection against asset quality deterioration.

The Bank has not taken advantage of any netting benefits under an ISDA Master Agreement1 (or

similar) during the period. ICBC (London) plc itself does not have an external credit rating.

Table 20 – Counterparty Credit Risk for Derivative Contracts

Units in ‘000 USD

Exposure Class

Notional

Value

of

Derivatives

Credit

exposure

Collateral

held

Net Derivatives

Credit Exposure

Central governments or central banks


Institutions

920,878

31,042

31,042

Real Estate

-

- -

-

Corporates

920,878

110,431 -

110,431

Covered Bonds

-

- -

-

Total

1,841,757

141,472 -

141,472

11.1 Risk statement for Counterparty Credit Risk

The Bank’s counterparty credit risk profile is considered to be low, and in line with its risk tolerance.

With regard to its risk profile and strategy, the Bank concludes that the counterparty credit risk

management systems put in place are adequate.

12. Credit risk adjustments

12.1 Specific impairment and collective provisions

Past Due but not impaired loans: Contractual payments of either principal or interest being past

due up to 89 days are defined as past due but not impaired. Under this category, past due loans but

not impaired as at 31 December 2016 were nil (2015: Nil).

Past due and impaired loans: According to the Bank’s Impairments Policy, a financial asset or

group of assets is impaired and impairment losses are recognised only if there is objective evidence

as a result of one or more events that occurred after the initial recognition of the assets. At each

balance sheet date, the Bank assesses whether there is objective evidence of impairment. If evidence

exists, then a detailed impairment calculation is carried out to determine if an impairment loss should

be recognised. The amount of the loss is measured as the difference between the asset’s carrying

amount and the present value of estimated cash flows discounted at the financial asset’s original

effective interest rate.

Objective evidence of past due and impaired assets is based on the main criteria summarised below:

Significant financial difficulty of the issuer or obligor

Breach of contract such as clear evidence of event of default

1The ISDA Master Agreement permits the netting of payments due under the same transaction so that only a

single amount is exchanged between the parties, rather than numerous payments involving the same

transactions.


24 | P a g e

Payments of either principal or interest exceeding 90 days or more have not been received

The issuer or obligor will enter bankruptcy proceedings

The primary sources of repayment are insufficient to service the remaining contractual principal

and interest amounts, and the bank has to rely on secondary sources for repayment

The asset is no longer traded publicly or there is no market to trade the assets

Clear evidence of measurable data indicating that actual and future cash flows will be insufficient

to service interest and principal.

The Bank’s accounting policy for the determination of impairments is set out in Note 1 to the 2016

Financial Statements under ‘Impairment of financial assets’. A summary of the main provisions of

the policy is set out below.

Loans and advances to banks and customers

For loans and advances to banks and customers carried at amortised cost, the Bank assesses

individually and collectively whether there is objective evidence of impairment. For the purpose of

collective evaluation of impairment, which is intended to reflect incurred losses that have not yet

been specifically identified, financial assets may be grouped on the basis of similar credit risk

characteristics (e.g. asset type, industry, geographical risk etc.) and should reflect global risk factors

that are difficult to quantify.

Objective evidence of impairment may include loss events and other changes such as:

Significant financial difficulty of the borrower or obligor

Breach of contractual obligations such as non-payment or partial payment of interest or principal

Higher probability that the borrower will enter administration, liquidation or other financial

reorganisation

Shrinkage or disappearance of an active secondary market for that financial asset

For collectively-assessed assets, reduced estimates of future cash flows consistent with related

observable data such as unemployment, property prices, international sanctions and any other

factors indicating a higher probability of default. Changes in historical loss experience should

also result in reassessment of collective impairments.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is

measured as the difference between the assets carrying amount and the present value of estimated

future cash flows (excluding future expected credit losses that have not yet been incurred). The

carrying amount of the asset is reduced through the use of an allowance account and the amount of

the loss is recognised in the Profit and loss account. Interest income continues to be accrued on the

reduced carrying amount based on the original effective interest rate of the asset. Loans together

with the associated allowance are written off when there is no realistic prospect of future recovery

and all collateral has been realised or has been transferred to the Bank.

All impaired loans are reviewed for changes to the recoverable amount. If, in a subsequent year, the

amount of estimated impairment loss increases or decreases because of an event occurring after the

impairment was recognised, the previously recognised impairment loss is increased or reduced by

adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the

Profit and loss account.

The present value of the estimated cash flows is discounted at the financial asset’s original effective

interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment

loss is the current effective interest rate. The calculation of the present value of the estimated future

cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure

less costs for obtaining and selling the collateral, whether or not foreclosure is probable.


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Table 21 - Impaired exposures by geography and industry

Units in ‘000 USD

Type of counterparty Geography Industry Gross exposure

Specific

provision

Corporate USA(North

America)

Oil & gas $5,000 $5,000

Corporate Russia(Europe) Mining $25,000 $10,000

Total $30,000 $15,000

In 2016 there were 2 impaired loans. The Bank raised an additional specific provision of $3 million

from $12 million in 2015 taking the total to $15 million in 2016 as shown in Table 22 below. The

additional provision of $3 million relates to exposures in an oil and gas company in the USA. The

Bank has taken appropriate remedial actions including recourse to legal action in the court of New

York to recover its dues.

The other impaired loan relates to a coal mining company in Russia. The Bank maintained the

provision on a par with 2015 at $10 million because of some improvement in the company’s

performance and an increase in price of coal. There is also a plan for re-structuring of the loan

involving existing pre-export financing syndicated lenders and Russian State-owned banks. However,

the economic situation is still depressed, in part due to continuing sanctions by the EU and USA so

full recovery of the loan is expected to entail a protracted negotiation process.

The collective impairment provision as at 31 December 2016 was $2.020 million (2015: $2.079

million) which reflects the fact that losses, although not yet specifically identified, are known from

experience to exist within the Bank’s portfolio.

Collective impairment is calculated using outstanding credit exposures and drawdown of loans as at

31 December 2016 and applying the weighted average of PD’s (probability of default). The decrease

in collective provisioning from $2.079M in 2015 to $2.020M in 2016 as shown in table 15 was the

result of lower exposures and drawing.

Table 22 – Impairment Allowance

Units in ‘000 USD

Collective

Impairment

Specific

Impairment Total

$'000 $'000 $'000

Balance at 1 January 2016 2,079 12,000 14,079

Charge/(Reversal) during the year (59) 3,000 2,941

Balance at 31 December 2016 2,020 15,000

17,020


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13. Market risk

13.1 Market risk management objectives and policies

Market risk is defined as the risk of losses arising from movements in market prices. The risks

subject to the market risk measurement frameworks are:

Interest rate risk, credit spread and default risk, equity risk, foreign exchange risk and

commodities risk for covered instruments

Foreign exchange risk and commodities risk for Banking Book instruments.

The Bank does not currently undertake proprietary trading or engage in market making. Trading

Book exposures result solely from client servicing in the following products: FX spot, FX forwards,

FX swaps, and Interest Rate Swaps. In most cases, client servicing positions are back-to-back

squared2.

FX Banking Book risk exposures mainly originate from positions on interest income, financial and

tax expenses, and impairment provisions.

As such, the Bank is only exposed to general interest rate risk and foreign exchange risk.

The Bank’s objective of market risk management is to maintain a low risk profile. The Bank has set

out a market risk management strategy and established and maintains a Market Risk Management

Policy which outlines the market risk management process, criteria, and arrangements.

13.2 Measurement and reporting of market risk

13.2.1 Position risk

The Maturity-based Standardised approach for traded debt instruments has been used to measure

general position risk.

Table 23 below shows own funds requirement and total risk exposure amount as at 31 December

2016 for traded debt instruments (FX forward, FX swap and IRS) which is the evidence that the

position risk faced by the Bank is small.

Table 23 – Position risk exposure

Units in USD

Own funds

requirements

Total risk exposure

amount

19,453

243,157

13.2.2 Foreign exchange risk

Foreign currency exposure value is used to measure foreign exchange risk on a daily basis.

Throughout 2016, the foreign currency exposure was within set limits at all times. At the end of

2016, the overall FX exposure (shorthand3) was $909,724 (short). The largest individual currency

exposure was denominated in GBP.

2Back-to-back Squared – back-to-back hedged, i.e. fully offsetting a position to reduce the risk of adverse

price movements in an asset. 3Shorthand method is a way to measure the Bank's overall foreign exchange exposure, by using the greater of

the sum of the short positions and the long positions.


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As the sum of the Bank’s overall net foreign-exchange position, calculated in accordance with the

procedure set out in CRR Article 352, does not exceed 2 % of its total own funds, the Bank does not

calculate an own funds requirement for foreign exchange risk. The foreign currency positions as at 31

December 2016 are shown below:

Table 24 – Foreign exchange exposure

Units in USD

Foreign Exchange Exposure

Currency Exposure

GBP -746,918.81

RMB -162,656.23

Table 25 – FX Sensitivity Analysis

Units in USD

FX Sensitivity Analysis (USD)

USD appreciates 200 basis points 12,573



USD depreciates 200 basis points -12,575



13.2.3 Monitoring and reporting of market risk

In accordance with guidance from the Parent Bank, the Bank sets market risk limits to control market

risk. These limits are monitored by the Risk & ALM Department, which is independent from the

Treasury Department. The Risk & ALM Department submits regular reports to the Bank’s Asset and

Liability Committee and Risk Committee, which reviews major market risk indicators and makes any

necessary decisions. The Risk & ALM Department also submits weekly and monthly reports on

foreign currency exposures and trading products position to the Parent Bank, which in turn provides

the Bank with regular guidance on market risk management.

13.3 Risk statement for market risk

The Bank’s market risk profile is considered to be low, and in line with its risk tolerance. With

regard to its market risk profile and strategy, the Bank concludes that the market risk management

systems put in place are adequate.


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14. Operational risk

14.1 Operational risk management, objectives and policies

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes,

employees and IT systems, or from external events, including legal risk, but excluding strategic and

reputational risk. It is a pervasive risk that involves all aspects of the business as well as other agents

who deal with the Bank. When operational risks materialise, they not only have immediate financial

consequences for the Bank but also affect its business objectives, customer service and regulatory

responsibilities.

Operational risk is one of the principal risks in the overall Enterprise-Wide Risk Management

Framework. There are several major types of operational risks faced by the Bank, including internal

fraud, external fraud, clients, products, business practice, execution, delivery and process

management, employment system and workplace safety, damage to physical assets, and IT events.

As operational risk is inherent in the Bank’s processes, the objective of operational risk management

is not to remove operational risk altogether but to manage and control operational risk in a cost-

effective manner consistent with the Bank’s risk appetite. In achieving this, the Bank seeks:

To minimise the impact of losses suffered in the normal course of business (expected losses) and

avoid or reduce the likelihood of suffering a large extreme (or unexpected) loss

To improve the effective management of operations and thus strengthen the Bank’s reputation.

The Bank has established and maintained an Operational Risk Management Policy which defines

operational risk and its components, sets out the governance and responsibilities for controlling the

risk, articulates the risk appetite and limits, specifies the tools and processes of operational risk

management, details the operational risk capital allocation method and details the extent of public

disclosure.

14. 2 Measurement and reporting of operational risk

The Bank has adopted the BIA for the assessment of own funds requirements for operational risk;

therefore the Bank’s operational risk capital requirement (‘ORCR’) is equal to 15% of the three-year

average of the sum of the Bank’s Net Interest and Non-Interest Income. The operational risk charge

at 31 December 2016 was $10,214,133.10.

The Bank’s operational risk management framework consists of the following key components:

Identification and categorisation of the key operational risks faced by the business areas,

including defining risk appetite

Risk assessments, including financial and non-financial impact assessments for each of the key

risks to which the Bank is exposed

Control assessments, evaluating the effectiveness of the control framework covering each of the

key risks to which the Bank is exposed

Loss and incident management

The development of Key Risk Indicators (‘KRIs’) for management

Scenarios for estimation of potential loss exposures for material risks

Purchases of insurance to mitigate certain operational risk events.

14.3 Risk statement for operational risk

The Bank’s operational risk profile is considered to be medium, and in line with its risk tolerance.

There are no operational losses incurred in 2016. With regard to its operational risk profile and

strategy, the Bank concludes that the operational risk management systems put in place are adequate.


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15. Exposure to interest rate risk in the Banking Book

15.1 Interest rate risk management objectives and policies

Interest rate risk is defined as the risk of a negative impact on profitability and/or equity as a result of

interest rate movements. The different forms of interest rate risk are re-pricing risk, basis risk, yield

curve risk and option risk. At present, re-pricing risk and yield curve risk are major forms of interest

rate risk faced by the Bank.

The Bank’s objective of interest rate risk management (in the Banking Book) is to decrease the

sensitivity of the Bank’s earnings and economic value to market rate fluctuations, and maintain a

medium-low risk profile. The Bank has established and maintains an Interest Rate Risk Management

Policy which defines the interest rate risk management strategy, process, criteria, and arrangements.

15.2 Measurement and reporting of interest rate risk

Interest rate risk is measured and analysed on a quarterly basis. The Bank adopts Gap analysis,

Duration analysis and Scenario analysis for the measurement of interest rate risk in the Banking

Book, and views risk from the perspective of earnings and economic value. In the case of the

earnings perspective, the focus is on the impact of interest rate movements on the Net Interest

Income (‘NII’) over a time horizon of one year. The economic value perspective focuses on the

potential impact of interest rate movements on the market values of the Bank’s assets, liabilities and

off-balance-sheet instruments over a longer term.

On a quarterly basis, the interest rate gap is calculated on the contractual re-pricing maturity of the

underlying investments. There are no assumptions made on loan prepayments and deposit pre-

withdrawal. There is a particular time bucket for non-maturity deposits (mainly the Bank’s capital)

named as non-specific re-pricing column in FSA017 (the interest rate gap report).

Table 26 below shows the impact of a 100/200 basis point increase/decrease in the base rate on Net

Interest Income as at 31 December 2016.

Table 26 – Sensitivity analysis of 1Y Net Interest Income (NII)

Units in USD

Sensitivity analysis of 1Y NII (Net Interest Income)

Parallel shift in interest rate Net Interest Income

sensitivity

+100/-100 basis points 623,000 / -623,000

+200/-200 basis points 1,246,000 / -1,246,000


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Table 27 below shows the impact of a 200 basis points increase in the base rate on economic value at

31 December 2016.

Table 27 – Sensitivity analysis of economic value

Units in USD

Sensitivity analysis of economic value

Amount/Ratio

The impact of 200 basis point

change of interest rate on the

economic value

-7,348,000

Changes of the economic value /

capital -1.59%

15.2.1 Monitoring and reporting of interest rate risk

The sensitivity limit of economic value (changes of the economic value / capital) and Sensitivity

limit of 1Y NII are set to control interest rate risk on the Banking Book, analysed and monitored by

the Risk & ALM Department on a quarterly basis. The Risk & ALM Department submits regular

reports to the Bank’s ALCO and Risk Committee, which reviews interest rate risk on the Banking

Book using major risk indicators including, but not limited to, the following:

Cumulative re-pricing gap within 1year / interest bearing assets

Gap Sensitivity analysis in relation to interest income and capital

Scenario analysis: non parallel movements of interest rates.

The Risk & ALM Department also submits quarterly interest rate risk reports to the Parent Bank,

which in turn provides regular guidance on interest rate risk in the Banking Book.

15.3 Risk Statement for interest rate risk

The Bank’s interest rate risk profile is considered to be low, and in line with its risk tolerance. With

regard to its risk profile and strategy, the Bank concludes that the interest rate risk management

systems put in place are adequate.

16. Other Risks

Liquidity risk – The Bank is exposed to the risk that it may be unable to meet its obligations as they

fall due, arising from the differing maturity profiles of its assets, liabilities and off balance sheet

items. In line with the PRA’s liquidity rules, the Bank produces an Internal Liquidity Adequacy

Assessment Process (‘ILAAP’) document annually to assess the adequacy of its liquidity and funding

resources to cover the risks identified. The ILAAP also complies with the EBA guidelines on

common procedures and methodologies for the Supervisory Review and Evaluation Process (‘SREP’)

and aligns with the further guidance provided in PRA supervisory statement SS24/15. A buffer of

high quality liquid assets (‘HQLA’) is maintained to mitigate the Bank’s liquidity risk. The Bank met

the LCR regulatory requirement and internal limits at all times during 2016. The LCR is monitored

and reported daily. At the end of 2016, the LCR was 188%. The relevant COREP reports (NSFR,

ALMM and LCR) were submitted to the Regulator within the applicable timeframes.

Reputational Risk – the Bank places a very high degree of importance on the management of its

compliance with regulations and laws to help minimise the reputational risk arising from non-

compliance. The Bank is very mindful of the large amount of damage that could be done to its


31 | P a g e

reputation and to that of the wider group by any form of failure and this is reflected in its attitude to

risk.

Business Risk – The Bank is exposed to geopolitical, industry and regulatory risks that could impede

the fulfilment of its desired strategy and business plan. Senior Management maintain very close

contact with the Parent Bank to keep up-to-date with the latest economic conditions and

developments in China and their effect on the Bank in the UK. Developments in the UK and other

major markets are also closely monitored. Close liaison with Regulators ensures that the Bank

complies with all regulatory requirements and requests.

Legal Risk – The Bank takes care to avoid disputes by ensuring that all documentation

comprehensively covers the risks involved. The Bank will always seek specialist legal advice when

required.

Conduct Risk – The Bank is aware of the risks it faces from the improper professional conduct of its

employees. The Bank has a robust Fitness and Propriety policy and Conduct risk policy requiring

high standards of expected staff behaviour and the optimising of good customer outcomes.

Group Risk – The Bank is exposed to group risk in its liquidity management activities and via the

possible credit downgrading of the Parent Bank. Liquidity and funding risks are examined in detail in

the Bank’s Internal Liquidity Adequacy Assessment Process (‘ILAAP’).

The Bank currently has no exposure to equity risk or securitisation risk.

16.1 Risk Statement for Other risks

The Bank is exposed to numerous ‘other risks’ but considers these are in line with its risk tolerance.

With regard to its risk profile and strategy, the Bank concludes that the management systems put in

place for ‘other risks’ are adequate.

17. Remuneration

17.1 Overview

In accordance with the Capital Requirements Regulation (CRR) remuneration disclosure

requirements, as further elaborated in the FCA’s General Guidance on Proportionality: The

Remuneration Code (SYSC 19) and the PRA’s LSS8/13, ‘Remuneration standards: the application of

proportionality’, the Bank falls within proportionality Level 3.

As a Level 3 firm, the Bank is able to dis-apply the following rules: SYSC 19A.3.47R concerning the

payment of variable remuneration in shares and capital instruments and SYSC 19A.3.49R and SYSC

19A.3.51R concerning deferred remuneration.

In accordance with the Pillar 3 Disclosures on Remuneration (Article 450 of the CRR) the Bank is

required to provide disclosures regarding its remuneration policy and practices for those categories of

staff whose professional activities have a material impact on its risk profile, ‘material risk takers’.

The Remuneration Policy (‘the Policy’) recognises the need to attract, motivate and retain high-

calibre staff necessary to obtain business results. The Policy operates in the context of ICBC

(London) plc’s business goals and the Bank’s other people policies. It aims to ensure remuneration

practices are fair and consistent with the Bank’s view on equality and diversity.

Recruitment will be solely on the basis of the applicant's abilities and individual merit as measured

against the criteria for the job. Qualifications, experience and skills will be assessed at the level that

is relevant to the job. The Bank applies an equal opportunities policy for all stages of the recruitment

process, e.g. short listing, interviewing and selection.


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The Bank implements and maintains remuneration policies, procedures and practices that are

consistent with and promote sound and effective risk management.

17.2 Decision-making process for determining Remuneration Policy

Governance of all matters related to remuneration with the Bank lies with the Board, which includes

two independent Non-Executive Directors. These Non-Executive Directors are considered to be both

independent of the Bank and in possession of the necessary skills to exercise appropriate judgment.

Board meetings are held on a quarterly basis.

The Board is responsible for the implementation of the Remuneration Code and the annual review of

the Bank’s adherence to it. It is also the Bank’s current policy that the implementation of the

remuneration policy is subject to an independent review by the Bank’s Internal Audit Department.

In setting Remuneration Policy, the Board recognises its role in ensuring remuneration arrangements

that are structured in order to promote an effective risk management culture aligned with the Bank’s

business strategy, objectives and long terms interests. This is balanced with the need to recruit and

motivate suitably experienced staff with competitive pay and benefits comparable to similar

organisations in the market place.

The Board is responsible for approving and maintaining the Policy. The Board takes into account

inputs from the Risk & ALM, Human Resources & Administration, Compliance & Legal and

Financial Control Departments. The Board will consider information affecting remuneration

throughout the year and will ensure that remuneration policies, practices and procedures are clear and

documented, including the performance appraisal process and decisions.

No external consultants have been used for the determination of the Remuneration Policy.

17.3 Information on the link between pay and performance

The Bank ensures that the structure of an employee’s remuneration is both consistent with the market

and promotes effective risk management. The Bank sets the fixed component of remuneration to

represent a sufficiently high proportion of the total remuneration to allow the operation of a fully

flexible policy on variable remuneration components. Fixed components of remuneration represent

base salary as well as cash and non-cash benefits.

The variable component of remuneration is in the form of an annual discretionary bonus. Bonus is

performance related and is based on a combination of the assessment of the performance of the

individual, the business unit concerned and the overall results of the Bank.

The Bank would not consider any total variable remuneration that would limit the firm’s ability to

strengthen its capital base.

Key Performance Indicators are set on an annual basis for the Bank, departments and individuals.

These indicators are financial and non-financial. This means that when assessing performance both

financial and non-financial criteria are taken into account. Assessments of the Bank’s financial

performance used to calculate variable remuneration are based principally on profits. Variable

remuneration will be impacted where negative financial performance of the Bank occurs. Non-

financial performance metrics form a significant part of the performance assessment process and

include:

Effective adherence to risk management and compliance with the regulatory system

Individual role level and market value

Assessed individual performance


33 | P a g e

Behaviours that pose a risk to the Bank’s values/goals, as expressed in the Professional

Conduct Policy, can override assessments of financial performance.

The Bank does not pay guaranteed variable remuneration; payments are made to reflect performance

achieved. The Bank does not have long term incentive plans. Furthermore the Bank does not offer

shares, options or other non-cash variable remuneration instruments.

In 2016, the Bank did not offer any sign-on inducements and no severance payments or deferred

remuneration were made.

Pension policy

The Bank operates a group personal pension scheme with fixed monthly employer contribution with

the facility for employee contributions. No discretionary pension benefits are paid to staff.

17.4 Quantitative Information

As at 31 December 2016, the Bank employed 132 staff, 110 of whom were eligible for variable

remuneration awards in respect of their service during 2016. The Remuneration Code requires that

banks identify relevant staff including senior management, risk takers, staff engaged in control

functions and any employees receiving total remuneration that takes them into the same remuneration

bracket as senior management and risk takers, whose professional activities have a material impact

on the firm's risk profile and designate them as ‘Code Staff’. A total of 19 Code Staff were

identified in 2016, including those that serve on the Executive Committee. Of these, two Code Staff

left during the year, having performed 15 months service combined in 2016 and in November a new

member of Code Staff joined the Bank. Tables 28 and 29 below provide remuneration details for

Code Staff.

Table 28 – The aggregate quantitative information for Code Staff on remuneration, broken down by

business area as of 31 December 2016 (Art 450 (1)(g) of CRR)

Units in USD*

Business area Remuneration

Senior Management (Board and ExCo) 1,304,083

Sales, Trading and Risk 2,737,947

Central Support 496,336

Total Code Staff 4,538,366

* 1GBP = 1.3551 USD for 2016 (Average rate)

Table 29 – The aggregate quantitative information on remuneration, broken down by fixed and variable

of Senior Management and other Code Staff as of 31 December 2016 (Article 405 (1)(h) of CRR)

Units in USD*

Fixed

remuneration**

Variable

remuneration

(bonus)

Total

Ratio between

fixed and

variable

Senior Management

(Board and ExCo) 1,117,030 187,053 1,304,083 6:1

Other Code Staff 2,724,906 509,376 3,234,283 5:1

Total Code Staff 3,841,936 696,430 4,538,366 6:1

* 1GBP = 1.3551 USD for 2016 (Average rate).

** Includes cash allowances and non-cash allowances

http://fshandbook.info/FS/glossary-html/handbook/Glossary/E?definition=G365

http://fshandbook.info/FS/glossary-html/handbook/Glossary/R?definition=G1013

http://fshandbook.info/FS/glossary-html/handbook/Glossary/F?definition=G430


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ICBC (London) plc

81 King William Street

London EC4N 7BG

United Kingdom

www.icbclondon.com

http://www.icbclondon.com/