RISK EXPOSURE AND ASSESSMENT

Transcription

1 RISK EXPOSURE AND ASSESSMENT The complexity of today s financial sector, business operations and diversity of geographical locations requires identification, measurement, aggregation and effective management of risks and efficient allocation of capital to derive an optimal risk and return ratio. Saudi Investment Bank (SAIB) manages its risks in a structured, systematic and transparent manner through a broad risk policy that embeds comprehensive risk management into the organizational structure, risk measurement and monitoring processes. The key features of SAIB s comprehensive risk management policy are: The Board of Directors (The Board) provides overall risk management direction and oversight. SAIB s risk appetite is determined by the Executive Committee and approved by The Board. Risk management is embedded in the bank as an intrinsic process and is a core competency of all its employees. SAIB manages its credit, market, operational and liquidity risks in a coordinated manner within the organization. SAIB s risk management function is independent of the business divisions. SAIB s internal audit function reports to The Board Audit Committee and provides independent validation of the business unit s compliance with risk policies and procedures and the adequacy and effectiveness of the risk management framework on a bank-wide basis. The risk management function assists senior management in controlling and actively managing SAIB s overall risk. The function also ensures that: SAIB s overall business strategy is consistent with its risk appetite approved by The Board and allocated by Management Executive Committee. Risk policies, procedures and methodologies are consistent with SAIB s risk appetite. Appropriate risk management architecture and systems are developed and implemented. The portfolio of risks and limits are monitored throughout the bank, including at appropriate regional levels. Scope and nature of risk reporting tools: The comprehensive risk management framework enables SAIB to identify assess, limit and monitor risks using a wide range of quantitative and qualitative tools. Some of these tools are common to a number of risk categories, while others are tailored to the particular features of specific risk categories and enable generation of information such as: Credit risk in commercial and consumer lending and other asset exposures such as collateral coverage ratio, limit utilization, past - due and Alerts, etc. Quantification of the susceptibility of the market value of single positions or portfolios to changes in market parameters (commonly referred to as sensitivity analysis). Quantification of exposure to losses due to extreme movements in market prices or rates. SAIB continuously assesses the adequacy and effectiveness of its reporting tools and metrics in light of the changing risk Environment. 1

2 Risk management processes: Through the comprehensive risk management framework, transactions and outstanding risk exposures are quantified and compared against authorized limits, whereas non-quantifiable risks are monitored against policy guidelines and key risk and control indicators. Any discrepancies, excesses or deviations are escalated to the management for appropriate action. 2

3 TABLE 1 SCOPE OF THE APPLICATION 1.1 The name of the top corporate entity in the group to which this Framework applies is SAIB. 1.2 The results of subsidiaries acquired or disposed off during the year are fully included in the consolidated statement of income from the date of the acquisition or up to the date of disposal, as appropriate. SAIB has the following two subsidiaries: Al-Istithmar Capital (ALC_99% ownership) provides brokerage and investment banking and corporate advisory services. SAIB BNP Paribas Asset Management Company (AMCO_55% ownership) is an asset management company and provides corporate finance; private equity and debt capital markets services. 1.3 Investments in associates are initially recognized at cost and subsequently accounted for under the equity method of accounting. SAIB has its Significant strategic investment in the following associates: Amex (Saudi Arabia) Ltd. - (ASAL), a limited liability joint venture company with Amex (Middle East), Bahrain (50% Ownership), Saudi Orix Leasing Company, a Saudi Arabian closed joint stock company formed with Orix Corporation-Japan (28% Ownership), Amlak International for Finance and Real Estate Development Co. (29% Ownership), and Medgulf KSA (21.4% Ownership). SAIB has no subsidiaries or other business activities outside KSA. 1.4 SAIB is subject to all laws and regulations of the KSA and is regulated by Saudi Arabian Monetary Agency (SAMA). SAIB also follows regulations issued by the Ministry of Commerce and the Capital Market Authority. 1.5 There are no restrictions, or other major impediments, on the transfer of funds or regulatory capital within the group. 3

4 Particulars TABLE 1: SCOPE OF APPLICATION Capital Deficiencies (Table 1, (e)) Amount The aggregate amount of capital deficiencies in subsidiaries not included in the consolidation i.e. that are deducted: 1. Subsidiary 1 NIL 2. Subsidiary 2 NIL 3. Subsidiary 3 NIL 4. Subsidiary n NIL 4

5 TABLE 2 CAPITAL STRUCTURE Capital of SAIB comprises of: 2.1 Eligible Paid-up Share Capital of SAIB as at December 31, 2008 was comprised of 450 million issued and fully paid up ordinary shares of SAR 10 each (2007: 391million). The total capital attributable to shareholders as at December 31, 2008 was SAR 6,609 million (2007: SAR 6,770 million). 2.2 Tier 1 capital as at Dec 31, 2008 was SAR 6,248,431 thousand which is considered as the core measure of the bank's financial strength and includes share capital, reserves, retained earnings and minority interests (net of treasury shares and goodwill) 2.3 Tier 2 capital as at Dec 31, 2008 was SAR 179,942 thousand which consists of the allowed portions of revaluation reserves and general provisions. 2.4 Eligible reserves are created by accumulated appropriations of profit and are maintained for future growth and to meet the statutory requirement. The eligible reserves mainly comprise of statutory reserves, other reserves and retained earnings. 5

6 TABLE 2: CAPITAL STRUCTURE Capital Structure (Table 2, (b) to (e)) Components of capital Amount Core capital - Tier I: Eligible paid-up share capital 4,500,000 Eligible reserves 2,287,000 Minority interests in the equity of subsidiaries 27,496 Others (44,490) Retained earnings 412,475 IAS type adjustments* Deductions from Tier I: Reciprocal holding of bank capital at 50% deduction (573,883) Significant minority investments at 10% and above at 50% deduction: (359,711) Banking and securities entities not fully consolidated (6,000) Insurance organizations Commercial organizations Supplementary capital - Tier 2: (456) (131,119) (222,592) Total Tier I ( A ) 6,248,431 Qualifying general provisions 540,109 Deductions from Tier II: Reciprocal holding of bank capital at 50% deduction (456) Significant minority investments at 10% and above at 50% deduction: (359,711) Banking and securities entities not fully consolidated (6,000) Insurance organizations (131,119) Commercial organizations (222,592) Total Tier II ( B ) 179,942 Tier I and Tier II Capital Available for Market Risk Total eligible capital ( A + B ) 6,428,373 6

7 TABLE 3 CAPITAL ADEQUACY 3.1 While managing capital SAIB s objectives are to comply with the capital requirements set by SAMA; to safeguard the Bank s ability to continue as a going concern; and to maintain a strong capital base. 3.2 On daily basis SAIB monitors Capital adequacy and the use of the regulatory capital. SAMA requires holding a minimum level of the regulatory capital of and maintaining a ratio of total regulatory capital to the risk-weighted assets at or above the specified minimum of 8%. 3.3 SAIB monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank s eligible capital with its balance sheet assets, commitments and notional amount of derivatives at a weighted amount to reflect their relative risk. 3.4 SAIB ensures adherence to SAMA s requirements by monitoring its capital adequacy against higher internal limits. 3.5 A comprehensive analysis of capital assessment and adequacy, through the process of Internal Capital Adequacy Assessment Plan (ICAAP), is carried out by SAIB on annual basis. For which wherever possible, robust models and commonly accepted methodology is applied for the estimation of the capital. This process is supported by the use of proprietary capital planning methodology. 3.6 Based on the detailed analysis, SAIB s balance sheet remains strong. The Bank is adequately capitalized for current and potential risk, which may manifests during the next year. In addition to this, SAIB has sufficient capital cushion to absorb unanticipated shocks to the balance sheet for the year Each subsidiary is also directly regulated by SAMA s rules and regulations, which sets and monitors its capital adequacy requirements. 7

8 TABLE 3: CAPITAL ADEQUACY Amount of Exposures Subject To Standardized Approach of Credit Risk and related Capital Requirements (TABLE 3, (b)) Portfolios Amount of exposures Capital requirements Sovereigns and central banks: SAMA and Saudi Government 11,158,067 Others Multilateral Development Banks (MDBs) Public Sector Entities (PSEs) Banks and securities firms 6,526,776 Corporates 18,875,513 Retail non-mortgages 2,007,220 Small Business Facilities Enterprises (SBFE's) 17,430 Mortgages Residential Commercial 627,240 Securitized assets Equity Others 16,035,665 Total 55,247, ,910 1,483, ,652 1,151 50,179 1,286,019 3,134,592 8

9 TABLE 3: CAPITAL ADEQUACY Capital Requirements For Market Risk* (822, Table 3, (d)) Particulars Interest rate risk Equity position risk Foreign exchange risk Commodity risk Total Standardized approach 43,326 43,326 * Capital requirements are to be disclosed only for the approaches used. 9

10 TABLE 3: CAPITAL ADEQUACY Capital Requirements for Operational Risk* (Table 3, (e)) Particulars Capital requirement Basic indicator approach 249,822 * Capital requirement is to be disclosed only for the approach used. 10

11 TABLE 3: CAPITAL ADEQUACY Particulars Capital Adequacy Ratios (TABLE 3, (f)) Total capital ratio % Tier 1 capital ratio Top consolidated level

12 TABLE 4 CREDIT RISK SAIB manages exposure to credit risk, which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities. There is also credit risk in off-balance sheet financial instruments, such as loan commitments. 4.1 Credit risk management strategy The approach to credit risk management is based on the foundation to preserve the independence and integrity of the credit risk assessment, management and reporting processes combined with clear policies, limits and approval structures which guide the day-to-day initiation and management of the SAIB s credit risk exposure. This approach comprises credit limits that are established for all customers after a careful assessment of their creditworthiness. Standing procedures, outlined in the SAIB s Credit Policy Manual, require that all credit proposals be subjected to detailed screening by the credit management divisions pending submission to the appropriate credit committee. Whenever necessary, credit facilities are secured by acceptable forms of collateral to mitigate the related credit risks. The Board defines the SAIB s credit risk management strategy and approves significant credit risk policies to ensure alignment of the SAIB s exposure with their risk appetite. SAIB also uses the external ratings of the major rating agencies, where available. SAIB attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. SAIB s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored daily. In addition to monitoring credit limits, SAIB manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases the Bank may also close out transactions or assign them to other counterparties to mitigate credit risk. SAIB s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation, and to control the level of credit risk taken. SAIB assesses counterparties using the same techniques as for its lending activities. Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of SAIB s performance to developments affecting a particular industry or geographical location. SAIB assesses the probability of default of counterparties using internal rating tools. SAIB also uses the external ratings of the 12

13 major rating agencies, where available. SAIB seeks to manage its credit risk exposure through diversification of lending activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or business. SAIB also takes security when appropriate. SAIB also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans or advances. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. SAIB regularly reviews its risk management policies and systems to reflect changes in markets products and emerging best practice. The debt securities included in the investment portfolio are mainly sovereign risk. 4.2 Credit risk management structure Senior management and respective committees implements The Board s credit risk strategy and develops policies and procedures for identifying, assessing, monitoring and controlling credit risk. SAIB s Executive Committee chaired by the Chairman of the Board meets regularly to review the loan portfolio quality and standards Key features of corporate credit risk management Credit facilities are granted based on detailed credit risk assessments which consider the purpose of the facility and source of repayment, prevailing and potential macro-economic factors, industry trends and the customer s positioning within its industry peer-group. In compliance with SAMA regulations, lending to individual board members and related parties is fully secured and monitored by the Credit Committee. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. All new proposals and or material change to existing credit facilities are reviewed and approved by the credit committee. The credit facility administration process is undertaken by a segregated function to ensure proper execution of all credit approvals and maintenance of documentation, and proactive control over maturities, expiry of limits, collateral valuation and legal covenants. 4.3 Credit risk monitoring, reporting and measurement system SAIB s exposures are continuously monitored through a system of triggers and early-warning signals aimed at detecting adverse symptoms that could result in deterioration of credit risk quality. The triggers and early-warning systems are supplemented by facility utilization and collateral valuation monitoring together with a review of upcoming credit facility expiration and market intelligence to enable timely corrective action by management. The results of the monitoring process are reflected in the internal rating process. Credit risk is monitored on an ongoing basis with formal monthly and quarterly reporting to credit committee and senior 13

14 management to ensure senior management awareness of shifts in credit quality and portfolio performance along with changing external factors such as economic and business cycles. Consumer credit risk reporting also includes a dashboard for consumer and small business lending, classification and delinquency monitoring. A specialized and focused problem loan workout team handles the management and collection of problem credit facilities. 4.4 Credit risk mitigation strategy Portfolio diversification is the cornerstone of SAIB s credit risk mitigation strategy, which is implemented through customer, industry and geographical limit structures. To ensure diversification at the portfolio level interrelated companies with the same management or ownership structure are classified and treated as one entity. SAIB limits its credit concentration per entity to 25% of SAIB s capital and reserves. Credit risk mitigants such as collateral and guarantees are effective mitigating factors within SAIB s portfolio and collateral quality is continuously monitored and assessed. 4.5 Past-due and impairment Credit facilities are classified as past due when a payment has not been received on its contractual payment date, or if the facility is in excess of pre-approved limits. A credit facility is considered as impaired if the interest or a principal installment is past due for more than 90 days, or if the carrying amount of the facility is greater than its estimated recoverable value. 4.6 Approaches for specific and general allowances Past-due and impaired facilities are managed and monitored as irregular facilities and are classified into the following four categories which are then used to guide the provisioning process: Category Criteria Watch list Irregular for a period up to 90 days (inclusive) Substandard Irregular for a period between 91 and 180 days (inclusive) Doubtful Irregular for a period between 181 days and 365 days (inclusive) Bad Irregular for a period exceeding 365 days 14

15 SAIB may also include a credit facility in one of the above categories based on credit committee s review of a customer s financial and or non-financial circumstances. SAIB uses a credit classification system as a tool to assist in managing the quality of credit risk within the lending portfolio. It maintains ten classification grades that differentiate between performing and impaired portfolios and allocates portfolio provisions and specific provisions respectively. SAIB determines each individual borrower s grade based on specific objective and subjective criteria such as activity, cash flows, capital structure, strength of facility documentation, quality of management and borrower s character. SAIB conducts a quality classification exercise over all of its existing borrowers and the independent Risk Management Unit established within the Bank for the purpose validates the results of this exercise. SAMA assesses consumer loans collectively and the refinement of process is under consideration. Currently, the Bank s judgment of the portfolio provision on consumer loan portfolio is 1.0% of the to the outstanding exposure amount. The adequacy of provisions are regularly evaluated and monitored by the Credit Committee. SAIB uses external ratings (where available) from Fitch, S&P and Moody s to supplement internal ratings during the process of determining credit limits. Unrated public issue instruments are risk-weighted at 100% for capital adequacy purposes. 15

16 TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Credit Risk Exposure (Table 4, (b)) Portfolios Total gross credit risk exposure Average gross credit risk exposure over the period Sovereigns and central banks: SAMA and Saudi Government 11,162,231 Others Multilateral Development Banks (MDBs) Public Sector Entities (PSEs) Banks and securities firms 6,703,502 Corporates 22,272,681 Retail non-mortgages 2,013,868 Small Business Facilities Enterprises (SBFE's) 26,081 Mortgages: Residential Commercial 627,240 Securitized assets Equity Others 16,547,656 Total 59,353,259 9,170,018 7,254,424 20,147,536 1,977,077 20, ,240 17,969,658 57,099,347 16

17 TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Portfolios Geographic Breakdown (Table 4, (c)) Saudi Arabia Other GCC & Middle East Europe Geographic area North South East America Asia Others countries Total Sovereigns and central banks: SAMA and Saudi Government 1,162,231 11,162,231 Others - Multilateral Development Banks (MDBs) - Public Sector Entities (PSEs) - Banks and securities firms 3,085, ,863 2,410, ,716 9,218 92,008 6,703,502 Corporates 21,981,303 75, ,036 34,415 23,906 4,392 22,272,681 Retail non-mortgages 2,013,868 2,013,868 Small Business Facilities Enterprises (SBFE's) 26,081 26,081 Mortgages: - Residential - Commercial 627, ,240 Securitized assets - Equity - Others 16,547,656 16,547,656 Total 55,443, ,492 2,563, ,131 33,124 96,400 59,353,259 17

18 TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Portfolios Industry Sector Breakdown (Table 4, (d)) Industry sector Govt and quasi govt. Banks and other financial institutions Agriculture And fishing Manufactur ing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumer loans and credit cards Others Total Sovereigns and central banks: SAMA and Saudi Government 5,380,004 4,199 5,778,028 11,162,231 Others - Multilateral Development Banks (MDBs) - Public Sector Entities (PSEs) - Banks and securities firms 2,797,795 Corporates 3,687,756 17,589 2,627 3,885,491 6,703, , , ,765 3,732,220 5,141,010 32,482 2,654, ,681 5,202,850 22,272,681 Retail non-mortgages 84 1,981,660 32,124 2,013,868 Small Business Facilities Enterprises (SBFE's) 2,402 6, ,588 2, ,885 1,777 2,891 26,081 Mortgages: - Residential - Commercial 627, ,240 Securitized assets - Equity - Others 4,378,405 Total 16,246, ,334 75, , ,115 21,719 18,652 10,627, ,600 16,547, ,428 1,176, ,757 3,875,575 5,290,088 57,764 2,677,218 13,801,432 15,658,984 59,353,259 18

19 Portfolios TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Residual Contractual Maturity Breakdown (Table 4, (e)) Less than 8 days Maturity breakdown 8-30 days days days days 1-3 years 3-5 years Over 5 years No Fixed Maturity Total Sovereigns and central banks: - SAMA and Saudi Government 4,299, ,034 3, ,312 4,253, ,974 1,080,858 11,162,231 Others - Multilateral Development Banks (MDBs) - Public Sector Entities (PSEs) - Banks and securities firms 677,222 1,619, ,091 14,456 30, , ,325 1,190,029 1,715,907 6,703,502 Corporates 1,289,643 2,184,264 2,376,412 2,463,960 1,685,346 3,017,758 3,071,039 6,184,259 22,272,681 Retail non-mortgages 3,014 2,339 13,247 15,160 29, ,551 1,532,784 63,161 2,013,868 Small Business Facilities Enterprises (SBFE's) 1,759 1,798 3,275 5,372 2,479 2, ,062 26,081 Mortgages - Residential - Commercial 4,791 99,268 25, , , ,240 Securitized assets - Equity - Others 746, ,017 3,221,788 1,013,711 2,816,779 1,890,293 3,081,047 1,401,927 1,710,653 16,547,656 Total 7,017,354 4,805,622 6,283,173 4,079,239 4,565,193 9,948,568 9,111,730 9,034,962 4,507,418 59,353,259 19

20 Industry sector TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Impaired Loans, Past Due Loans and Allowances (Table 4, (f)) Impaired Defaulted Aging of Past Due Loans (days) loans Less than Over 360 Charges during the period Specific allowances Charge-offs during the period Balance at the end of the period General allowances Government and quasi government Banks and other financial institutions 3,162 2, Agriculture and fishing Manufacturing 31,216 Mining and quarrying Electricity, water, gas and health services 45,183 Building and construction 301 Commerce 4,050 39,291 39,291 26,400 45,183 4,773 40,410 39,400 1, ,171 1, ,384 3,500 Transportation and communication Services Consumer loans and credit cards 228,393 Others Total 309, ,452 10, , ,013 94, , ,485 12,579 28,005 60, ,258 15,113 12,076 22, ,201 22, , , ,379 15,113 12, , ,360 20

21 Geographic area TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Impaired Loans, Past Due Loans And Allowances (Table 4, (g)) Impaired Aging of Past Due Loans (days) Specific allowances loans Less than Over 360 General allowances Saudi Arabia 309,143 Other GCC & Middle East Europe North America South East Asia Others countries Total 309,143 22, , , , , ,360 22, , , , , ,360 21

22 TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES Reconciliation Of Changes In The Allowances For Loan Impairment (Table 4, (h)) Particulars Specific allowances General allowances Balance, beginning of the year 207, ,773 Charge-offs taken against the allowances during the period (12,076) Amounts set aside (or reversed) during the period 15,113 20,000 Other adjustments: - exchange rate differences - business combinations - acquisitions and disposals of subsidiaries - recoveries 2,956 Transfers between allowances (4,700) (413) Balance, end of the year 208, ,360 Charge-offs and recoveries that have been recorded directly to the income statement are SAR N/A...and SAR 2,956,, 000 respectively. 22

23 TABLE 5 STANDARDIZED APPROACH AND SUPERVISORY RISK WEIGHTS IN IRB APPROACH 5.1 Names of External Credit Assessment Institutions (ECAIs) used, plus reasons for any changes SAIB uses the ratings issued by Standard & Poor s (S&P), Moody s, and Fitch, which are the ECAIs approved by SAMA for the Standardized Approach. Until now, there has been no change in the ECAI used by SAIB. The Bank has not yet implemented the IRB Approach. 5.2 Types of Exposures for which each Agency is used SAIB does not use any specific agency exclusively for any particular type of exposure. The available ratings of any of the aforementioned three approved ECAIs on the obligors classified as Sovereign, Public Sector Entities ( PSE ), Multilateral Development Banks ( MDB ), Banks and Security Firms, and Corporates are used for risk weighting the Bank s exposures on them. 5.3 A description of the process used to transfer public issue ratings to comparable assets in the banking book Unless the Bank s exposure on the obligor has a current issue rating from an acceptable ECAI, the long term Issuer Rating(s) on the borrower/counterparty are used provided that the Bank s exposure is not less than that of a senior unsecured exposure on the concerned obligor. Distinction between long-term and short-term claims is made only in respect of claims on banks. Generally short-term ratings are deemed to be issue specific to be used only for the rated short-term facility. Short-term ratings are not used for any other shortterm claims. If there are three or more assessments with different risk weights, the assessments corresponding to the two lowest risk weights are referred to and the higher of those risk weights is applied. In general SAIB follows the guidelines issued by SAMA in respect of the use of the ECAI ratings. 5.4 The alignment of alphanumerical scale of each agency used with risk buckets These alignments of the ratings of each ECAIs are made as per the standard mapping published by SAMA. 23

24 TABLE 5 (STA): CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDIZED APPROACH Allocation Of Exposures To Risk Buckets (Table 5, (b)) Particulars 0% Risk buckets 20% 50% 75% 100% 150% Other risk Unrated * weights Total Deducted Sovereigns and central banks: SAMA and Saudi Government 11,162,231 11,162,231 Others Multilateral Development Banks (MDBs) Public Sector Entities (PSEs) Banks and securities firms 3,008,683 3,309, ,135 2,452 6,703,502 Corporates 452,698 21,742,629 77,354 22,272,681 Retail non-mortgages 1,992, ,031 2,013,868 Small Business Facilities Enterprises (SBFE's) 23,995 1,022 1,064 26,081 Mortgages: Residential Commercial 627, ,240 Securitized assets Equity Others 273, ,313 15,449, ,264 16,547,656 Grand Total 11,435,841 3,648,694 3,309,232 2,016,990 38,204, ,165 59,353, ,711 * Unrated exposures are reported under the Risk weight applicable to the respective portfolios. 24

25 TABLE 7 CREDIT RISK MITIGATION: DISCLOSURES FOR STANDARDIZED AND IRB APPORAOCHES 7.1 Policies and processes for and an indication of the extent to which the bank makes use of, on-and off balance netting In accordance with the current guidelines of SAMA, the SAIB uses on-balance sheet and off-balance sheet netting only in respect of derivative transactions. 7.2 Policies and processes for collateral valuation and management It is SAIB s policy to disburse facilities only after receipt of the collateral at the stipulated coverage ratio approved by the credit approving authority. The collateral requirements are also determined under specific lending programs approved by the Board. The documentation and securities review procedure established within the Credit Administration Department ensures that all the pre-conditions of accepting collateral, as per approval, are met prior to authorization of facilities in the Bank s systems. The collateral are valued depending upon nature of the collateral received such as in the case of real estate, Evaluation reports from the Bank s approved Appraisers are only accepted and relied upon for initial valuation of collateral and as appraised from time to time. Marketable securities are valued on the basis of net assets value (NAV) or marked-to-market (MTM). However, NAV is used in relevant cases where MTM is not available such as in the case of Mutual Funds. The financial collaterals are securely blocked in the relevant accounts marked as pledged/blocked. Maintenance of collateral valuations at the required coverage monitored and managed through collateral adequacy reports. 7.3 A description of the main types of collateral taken by the Bank Under the Standardized Approach followed by SAIB for credit risk, only financial collateral excluding equity shares and mutual funds are taken into account for determining the level of credit mitigation received on the Bank s exposures The main types of collateral eligible for credit risk mitigation under the Standardized Approach are: 1.) Cash, Cash Margins, 2.) Gold, 3.) Debt Securities with ratings of not less than BB (S&P) if they were issued by Sovereigns and PSEs treated as Sovereigns, or not less than BBB- (S&P) if they were issued by other entities (including banks and security firms). If the debt securities issued by the above listed entities are short-term in nature, the instruments to be eligible as an acceptable credit risk mitigants should have been rated at least A3 (S&P) or P-3 (Moody s). Unrated debt securities issued by a bank, which are listed on a recognized stock exchange, classified as senior debt, and fulfilling certain other criteria specified by SAMA, are also considered as an acceptable collateral. 25

26 4.) SAIB also takes, wherever available or considered necessary, other types of collateral security such as: a) equity shares listed on a recognized stock exchange, b) real estate property, c) mutual funds, and d) acknowledged assignment of receivables of the borrowers etc although they are not treated as eligible collateral for the purpose of calculating risk weighted exposures of obligors for the Standardized Approach of credit risk under the Basel II Guidelines The main types of guarantor/credit derivative counterparty and their credit worthiness 1.) Sovereigns, PSEs, banks and security firms with a lower risk weight than the obligor; and 2.) Other entities rated A- (S&P) or better or the equivalent rating grade of other approved ECAI. 3.) SAIB in addition to the above also takes the guarantees of other creditworthy entities and individuals with high net worth, wherever considered prudent or available, even though such credit protection may not be eligible to be treated as acceptable credit risk mitigants under the Basel II Guidelines. 7.5 Information about (market or credit) risk concentrations within the mitigation taken There are no material risk concentrations in the mitigation taken by SAIB for calculating the capital requirements under the Basel II Guidelines. Under the Standardized Approach followed by SAIB, the types of eligible financial collateral are very limited and exclude all equity instruments and equity mutual funds under the current directives of SAMA. 26

27 Portfolios TABLE 7 (STA): CREDIT RISK MITIGATION (CRM): DISCLOSURES FOR STANDARDIZED APPROACH Sovereigns and central banks: SAMA and Saudi Government Others Multilateral Development Banks (MDBs) Public Sector Entities (PSEs) Credit Risk Exposure Covered By CRM (Table 7, (b) and (c)) Eligible financial collateral * Banks and securities firms 700 Corporates 104,953 Retail non-mortgages 3,370 Small Business Facilities Enterprises (SBFE's) 2,038 Mortgages: Residential Commercial Securitized assets Equity Others 18,336 Total 129,397 Covered by Guarantees / credit derivatives * 20,216 20,216 27

28 TABLE 8 GENERAL DISCLOSURE FOR EXPOSURE RELATED TO COUNTERPARTY CREDIT RISK 8.1 The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. 8.2 The Bank s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored daily. 8.3 In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases the Bank may also close out transactions or assign them to other counterparties to mitigate credit risk. 8.4 The Bank s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation, and to control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. 28

29 TABLE 8: GENERAL DISCLOSURES FOR EXPOSURES RELATED TO COUNTERPARTY CREDIT RISK (CCR) General Disclosures (Table 8, (b) and (d)) Particulars Amount Gross positive fair value of contracts 75,879 Netting Benefits* Netted Current Credit Exposure* Collateral held: -Cash -Government securities -Others Exposure amount (under the applicable method) -Internal Models Method (IMM) -Current Exposure Method (CEM) 2,200,551 Notional value of credit derivative hedges Current credit exposure (by type of credit exposure): -Interest rate contracts 1,337,485 -FX contracts 863,066 -Equity contracts -Credit derivatives -Commodity/other contracts Bank's estimate of Alpha (if the bank has received supervisory approval) is N/A. * Currently, netting for credit exposure measurement purposes not permitted in KSA. 29

30 TABLE 9 SECURITIZATION: DISCLOSURE FOR STANDARDIZED AND IRB APPROCHAES SAIB does not have any Securitization exposure / risk. 30

31 TABLE 10 MARKET RISK: DISCLOSURE FOR BANKS USING THE STANDARDIZED APPROACHES Market risk is defined as the potential loss in value of financial instruments caused by adverse movements in market variables such as interest rates, foreign exchange rates and equity prices Market-risk management framework The market-risk management framework governs SAIB s trading and non-trading related market risk. The relevant Head of department manages market risk stemming from trading activities. The monitoring and oversights of market risk inherent within SAIB s non-trading activities is the responsibility of SAIB s Asset and Liability Management Committee (ALMAC). All activities giving rise to market risk are conducted within a structure of approved credit and position limits Monitoring of market risk from trading activities SAIB s risk management function independently monitors the regional and global trading market risk exposure through a Value-at- Risk methodology (VaR) to derive quantitative measures specifically for market risk under normal market conditions. This enables SAIB to apply a constant and uniform measure across all of its trading activities and facilitates comparisons of market risk estimates, both over time and against daily trading results. VaR is calculated using a 99% confidence level and a holding period of ten days in line with Basel Committee guidelines. On a daily basis, VaR is supplemented with stress testing to quantify market risk under extreme stress scenarios based on observed historical worst-case and in-house developed scenarios. Furthermore, SAIB recognizes and mitigates the correlation of other risks and processes on its market-risk monitoring process. In addition to VaR, SAIB uses a structure of limits to manage and control its market risk associated with trading activities Monitoring of non-trading market risk in the banking book SAIB s key non-trading market risk is the sensitivity of its net interest income to movements in interest rates. The interest-rate risk in the banking book is managed through a gap limit structure which is supplemented by periodic analysis of scenarios (instantaneous parallel shift of +/-5 bps and +/-10bps to the yield curve) to capture the extreme indicative measure of exposure to interest rate changes. SAIB does not use the result of scenario analysis to predict changes in its earnings because of the simplified assumptions inherent in the scenario analysis. Such assumptions includes that interest rates move by the same percentage irrespective of maturity, that all positions run to maturity and that no management corrective action is taken to mitigate the impact of interest-rate risk. In addition to interest -rate risk, SAIB is also exposed to market risk as a result of changes in the fair value of its strategic equity 31

32 and investment positions held without any intention of liquidation. All revaluation gains or losses during the year relating to equity investments were recorded in the balance sheet. SAIB doesn t maintain on-balance sheet trading positions and hence all exposures are captured within the banking book. All treasury and investment related positions emanating market risk operate within a management defined and board approved limits and are closely and continuously monitored-including intraday monitoring of price sensitive positions. 32

33 TABLE 10: MARKET RISK: DISCLOSURES FOR BANKS USING THE STANDARDIZED APPROACH Level Of Market Risks In Terms Of Capital Requirements (Table 10, (b)) Particulars Interest rate risk Equity position risk Foreign exchange risk Commodity risk Capital requirements 43,326 43,326 Total 33

34 TABLE 12 OPERATIONAL RISK Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events Strategies and Processes SAIB's Operational Risk Management Framework approved by The Board provides a bank-wide definition of operational risk and lays down the principles of how operational risk is to be identified, assessed, monitored and controlled through: Continuous assessment of operational risks and their controls at all the business units of the Bank; Close monitoring of all operational activities of the Bank for risks and controls. The key components of this framework are comprehensive documented policies, procedures and internal controls Structure and organization of Operational Risk Management function A Senior Management Committee has the overall responsibility for supervising the development and implementation of policies, processes and procedures for managing operational risk in all of the Bank's material products, activities, processes and systems. Through the Framework of The Operational Risk Management Department (ORMD), the business line management is able to identify, assess and decide in what form and scale they can accept, control and reduce operational risks together with the risk prevention measures that are necessary. ORMD collates and reviews actual and potential loss data arising from the Bank's day-to-day operations to continuously refine the mitigation and control arrangements. The Operational Risk Framework is supplemented by regular reviews by the Bank's internal audit function Scope and nature of operational risk reporting and/or measurement systems A proactive approach is being adopted by SAIB to identify, measure and mitigate all the material operational risks the Bank is subjected to in order to bring the residual risk at the bare minimum acceptable level; Following policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigates; Ongoing testing of effectiveness of available controls to bring about improvement in the existing controls; Designing new controls for risk mitigation wherever required; Assess the insurance needs of the bank via current insurance policies; and SAIB has a Business Continuity Plan together with a well-equipped disaster recovery center that is tested periodically. 34

35 SAIB s business processes are closely monitored to identify, assess, control and prevent money laundering and terrorism financing and such initiatives are regularly reviewed to ensure full compliance with local regulatory requirements and international best practices Features of Bank s internal methodologies used in calculating the Operational Risk Minimum Capital requirements SAIB is currently using Basic Indicator Approach to arrive at the Operational Risk Capital Charge by taking 15% of the average gross income of the last three years. (Min. Capital required as at Dec 31, 2008 SAR 249.8M) 35

36 TABLE 13 EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS 13.1 Major investments in equities are quoted on daily basis and, therefore, very liquid in nature. A very small part of equity investment is unquoted Investments in associates are of strategic in nature and are accounted for using the equity method of accounting. 36

37 TABLE 13: EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS Particulars Value Of Investments (Table 13, (b)) Un-quoted investments Value disclosed in Financial Statements Fair value Value disclosed in Financial Statements Quoted investments Fair value Publicly quoted share values (if materially different from fair value) Investments 2,505 2, , ,618 37

38 TABLE 13: EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS Types And Nature of Investments (Table 13, (c)) Investments Publicly traded Privately held Government and quasi government Banks and other financial institutions 134,006 Agriculture and fishing 33,853 Manufacturing 14,440 Mining and quarrying Electricity, water, gas and health services Building and construction 65,367 Commerce Transportation and communication 76,033 Services 12,343 Others 167,577 Total 503,618 2,505 2,505 38

39 TABLE 13: EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS Gains / Losses Etc. (Table 13, (d) and (e)) Particulars Amount Cumulative realized gains (losses) arising from sales and liquidations in the reporting period 228,379 Total unrealized gains (losses) (131,410) Total latent revaluation gains (losses)* Unrealized gains (losses) included in Capital (131,410) Latent revaluation gains (losses) included in Capital* *Not applicable to KSA to date 39

40 TABLE 13: EQUITIES: DISCLOSURES FOR BANKING BOOK POSITIONS Capital Requirements (Table 13, (f)) Equity grouping Capital requirements Government and quasi government Banks and other financial institutions 10,720 Agriculture and fishing 2,708 Manufacturing 1,155 Mining and quarrying Electricity, water, gas and health services Building and construction 5,229 Commerce Transportation and communication 6,083 Services 987 Others 13,406 Total 40,289 40

41 TABLE 14 INTEREST RATE RISK IN BANKING BOOK (IRRBB) 14.1 Diversification of funding is an important component of SAIB S liquidity management strategy. The two largest components of the customer deposits- time deposits and other customer deposits- include repo transactions and margins held for irrevocable commitments respectively and, therefore, are relatively stable source of funding Significant portions of the customer s deposits are retail deposits, which are less sensitive to interest rate changes and therefore, considered more stable than market-based wholesale deposits SAIB is also benefited from stable money market transactions originated by treasury and investment through the normal course of business All interest rate sensitive assets and liabilities are segregated according to their appropriate interest re-pricing maturity dates and managed efficiently and effectively. 41

42 TABLE 14: INTEREST RATE RISK IN THE BANKING BOOK (IRRBB) 200bp Interest Rate Shocks for currencies with more than 5% of Assets or Liabilities (Table 14, (b)) Rate Shocks Change in earnings Upward rate shocks: SAR 143,140 USD (22,640) Downward rate shocks: SAR (143,140) USD 22,640 42