Risk and Capital Adequacy Report 30 September GER-nr,

Transcription

1 Risk and Capital Adequacy Report 30 September 2013 GER-nr,

2 TABLE OF CONTENTS 1. Objectives and Risk Policies Risk Management in General 3 Credit Risk 4 Market Risk 7 Liquidity Risk 7 Operational Risk 7 Risk on Capital Base 8 2. Capital Base 9 3. Solvency Requirement and Capital Base Adequacy 10 - including a description of internal processes and the solvency requirement model 4. Counterpart Risk Market Risk Exposure in shares, etc. not included in the bank s trading portfolio Exposure to interest risk in positions not included in the bank s trading portfolio Credit Risk 18 2/19

3 OBJECTIVES AND RISK POLICIES Risk Management in General The BANK of Greenland operates on the basis of a balanced risk profile. The bank s Board of Directors keep a watchful eye on the bank s risks and takes steps to follow up on developments. The Board of Directors has established an overriding framework as well as a set of principles for the various areas of risk. The bank maintains an on-going process for developing tools for identifying and managing risks. The Board of Management is responsible for the risk management function. The day-to-day management of risk is the job of the Credit / Foreign Affairs Department. Independent monitoring of this department is the job of the Accounts Department. The BANK of Greenland uses the standard method for credit and market risks as well as the base indicator method for operational risks. The most important risks in the operation of The BANK of Greenland and those which impact the bank s growth, earnings and financial position are the following: Credit Risk: Risk that the bank incurs a complete or partial financial loss as a result of its customers inability to live up to their commitments. Market Risk: Risk that the value of the bank s assets and liabilities are impacted by conditions in the marketplace, e.g. the state of the market, developments on stock exchanges and changes in foreign currency prices and interest rates. Liquidity Risk: Risk that the bank incurs a loss resulting from the bank s inability to live up to its commitments to depositors. Operational Risk: Risk that the bank incurs a complete or partial financial loss as the result of inadequate or inappropriate internal procedures, human error, IT systems, etc. Risk on Capital Base: Risk that the bank cannot comply with the banking acts minimum requirements for solvency, and that it cannot maintain individual solvency requirements. 3/19

4 OBJECTIVES AND RISK POLICIES Credit Risk Within the area of credit, the objective of The BANK of Greenland is to limit loss on loans, advances, credits and guarantees. However, the bank is well aware that providing credit is the bank s most important source of earnings; therefore an evaluation of the relation between earnings and risk is on-going. The BANK of Greenland manages its credit risk by means of established policies and business procedures. The Board of Directors at the bank has established these policies and procedures with a view to making loans available to those customers who, with their solid positions and earnings, ensure high quality of their exposure when compared with the interest margin paid. Credits, loans, advances and guarantees are provided at different levels within the bank depending on the size and risk of the exposure. The bank keeps a constant eye on all loans and guarantees above a certain level in order to ensure that any signs of failing ability to repay the debt to the bank can be identified as soon as possible so that the bank can then, in collaboration with its customer, avoid loss. Risk Concentrations The bank s risk concentration for loans and guarantees is part of its credit risk management. The bank wishes to find an appropriate spread of loans and guarantees to commercial as well as retail customers. Furthermore, the bank seeks a balanced spread of its loans and guarantees among the various lines of business among its corporate customers. The bank finds this spread appropriate in light of the potential range of business opportunities in the bank s market area. Exposures with one customer or a group of associated customers may not, after deduction of special secured claims, exceed 25% of the bank s capital basis in accordance with the Danish Financial Enterprise Act 145. The Danish Financial Supervisory Authority (FSA) receives quarterly reports of these figures. The BANK of Greenland has a policy stating that the sum of major exposures may not exceed 100% of its capital base. Credit exposures amounting to 10% or more of the bank s capital base End Q End 2012 End 2011 Major exposures - number Greater than 20 % of the capital base % of the capital base % of the capital base In percentage of the capital base /19

5 OBJECTIVES AND RISK POLICIES The BANK of Greenland wishes to maintain a good spread in the lines of business serviced. Loans and guarantee debtors distributed by sector and lines of Business (calculated before impairments and/or provisions). Lines of Business DKr 1,000 Public Authorities 343,624 Agriculture, hunting, fishing and forestry 122,593 Industry and mining 33,700 Energy supply 13,228 Construction companies - Construction of buildings 203,430 - Other construction activities 154,373 Total construction companies 357,803 Trade 297,114 Transport, hoteller og restauranter - Transportation, postal and courier services 171,136 - Hotels and restaurants 126,250 Total Transportation, hotels and restaurants 297,386 Information and communication 18,186 Financing and insurance 76,367 Total real estate 522,025 Other types of commerce 83,941 Total commercial activities 1,822,343 Retail customers 1,711,000 Total 3,876,967 It should be borne in mind that the distribution of loans, advances and guarantees according to lines of business should be evaluated in terms of the special geographical conditions in The BANK of Greenland s primary market area. Adjustment of Loan Exposures The BANK of Greenland keeps individual tabs on all its loans and advances above a predetermined limit. Other loans and guarantees are monitored on a group basis; however, when objective criteria indicate an increase in risk, these loans and guarantees are also evaluated individually. 5/19

6 OBJECTIVES AND RISK POLICIES Impairments on loans are done individually as well as in groups. Individual impairments are made when an objective indication that value deterioration has occurred resulting in a reduction of expected future repayments. Individual impairments are established and evaluated centrally by the bank s Credit Department. At the end of September 2013, exposures showing an objective indication of value deterioration amount to DKr 180.5m of which DKr 67.2m has been written off. Group deterioration on credit risk groups, where there has been no individual deterioration, is made on the basis of the model designed by the Danish Association of Local Credit Institutions into which The BANK of Greenland s historic losses have been incorporated. These deteriorations amount to a total of DKr 8.7m. Limits are placed on the amounts available for lending when individual deteriorations have taken place on a particular exposure. Loans are written off when the collateral put up has been realized, and there no longer is any reasonable possibility of repayment. Partial write-offs are made when exposures are settled over a lengthy period of time. Interest accrual ceases when there no longer is any expectation that the loan will be repaid. Collateral The majority of The BANK of Greenland s loans and advances has been secured by means of liens in real estate (private housing, office buildings, and other commercial property), in movable property (vehicles, operating equipment and the like), in fishing rights, in securities (shares, bonds and unit trusts), in cash deposited in banks, guarantees from other credit institutions or public authorities and by means of exposures in companies and sureties from the companies owners. Collateral is evaluated prudently on the principle of forced sale. During evaluation, special, geographical difficulties will be taken into consideration in the event of a forced sale. 6/19

7 OBJECTIVES AND RISK POLICIES Market Risk The bank strives to minimize any losses that may occur resulting from unforeseen developments on financial markets. Policy: The BANK of Greenland s market risk is managed by means of previously established limits on a large number of risks. Positions in shares and foreign currency are based on a framework related to the bank s capital base. As at 30 September 2013, the bank s portfolio of shares amounted to DKr m of which DKr m is invested in sector shares (shares in companies owned collaboratively by a number of financial enterprises). Positions in interest claims must be kept within a given interest rate risk of a maximum of 3%. At the end of June 2013, the total interest rate risk amounted to 0.9% of core capital after deductions. The bank has outsourced the management of its portfolio of bonds, and the administrator of this portfolio is subject to a risk framework with a maximum duration of 1.5 years. The BANK of Greenland has a limited position in foreign currency. The bank s risk in foreign currency at the end of September 2013, when measured by currency indicator 1, amounts to DKr m, or 4.3% of its core capital after deductions. Calculation and monitoring take place daily, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines. Liquidity Risk The BANK of Greenland seeks to maintain adequate liquidity contingency equivalent to 125% of the requirements stipulated in the Danish Act on Financial Enterprises. The bank s minimum requirement for liquid adequacy is 75%. At the end of September 2013, the bank s adequacy was 151.2%. Policy: The BANK of Greenland s liquidity contingency is managed by maintaining sufficient quantities of liquid funds, ultra-liquid securities, as well as its ability to take advantage of lines and committed lines.. The BANK of Greenland has a strong capital base and profit on its deposits. Despite this strength, the bank has arranged for a committed line of credit with another credit institution. Calculation and monitoring take place daily, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines. 7/19

8 OBJECTIVES AND RISK POLICIES Operational Risk The BANK of Greenland strives to limit its operational risks with due regard for the costs of such limitations. Policies: The BANK of Greenland has set up policies and a contingency plan for physical disasters and for IT shutdowns. The bank s IT operations are run from Bankernes EDB Central (BEC), located in Denmark, and the bank follows the instructions and recommendations issued by BEC. The bank does not develop its own IT systems. As at the end of September 2013, the bank has outsourced the following areas: Internal auditing Clearing Balances with debitors and creditors Foreign payments Customer orders Risk on Capital Base The BANK of Greenland maintains a strong capital base and a solvency ratio at the end of September 2013 of 20.8% without inclusion of the profit for period and the deduction for tax assets generated by payment of dividends. At the end of 2012, the bank s solvency ratio was 20.2% Calculation and monitoring take place monthly, and both the Board of Management as well as the Board of Directors receives timely reports based on previously established guidelines. 8/19

9 CAPITAL BASE The bank s capital base at the end of September 2013 (In DKr 1,000) Core capital Share capital 180,000 Profit brought forward 589,028 Deferred and activated tax assets - 2,470 Core capital after the primary deduction 766,558 Other deductions 0 Half of the capital total share, etc. >10% 0 Core capital including hybrid core capital after deductions 766,558 Supplementary capital Reserves for appreciation 18,444 Capital base before deductions 785,002 Deduction in core capital Half of the capital total share, etc. >10% 0 Capital base after deductions /19

10 SOLVENCY REQUIREMENT AND CAPITAL BASE ADEQUACY In accordance with current legislation, the Board of Directors and the Board of Management determine The BANK of Greenland s individual solvency requirements. Determination of the solvency requirement is constantly being evaluated by the Board of Management and the Board of Directors. These discussions are based on a memo containing a proposal on the size of the solvency requirement, including proposals on the choice of stress variables, stress levels, growth expectations and other relevant areas of risk. The Finance Manager is responsible for writing this memo. Furthermore, the Board of Directors has thorough discussion at least once a year on the method for calculating the bank s individual solvency requirements, including the risks and stress levels that should be taken into account when calculating the solvency requirement. The BANK of Greenland has implemented a model for calculating its solvency requirements based on a template designed by The Danish Association of Local Credit Institutions and the Danish Financial Supervisory Authority s (FSA) Guidelines on Capital Base Adequacy and Solvency Requirements for Credit Institutions. The management believes that, by employing this model, the bank will be able to calculate a solvency requirement that is adequate to cover the bank s risks. In this model, capital is set aside in four sets of risks (credit risk, market risk, operational risk and other risks). The first part of the model contains a number of stress tests that stress the individual accounting items by means of different variables. The stress tested variables measured when determining the solvency requirement: Capital for covering credit risks Impairment of loans, etc. 4.27% (group 3-credit institution) calculated on loans and guarantees before impairments and provisions for loss Capital for covering market risks Fall in share prices Rise in interest rates 30%, though 15% on shares, etc. in sector shares 1.35% on trading portfolios and 1% outside of trading portfolios. At the same time, the short interest (less than 1 year) is displaced by 0.7 percentage points in one direction and the long interest (more than 1 year) is displaced by 0.7 percentage points in the opposite direction. Currency risk Risk on derivatives 2.25% currency indicator 1 (Euro) 12% currency indicator 1 (other) 8% of positive market value 10/19

11 SOLVENCY REQUIREMENT AND CAPITAL BASE ADEQUACY Capital for covering other risks : General decrease in net income from interest 12% General fall in net income from Charges 17% Price decreases on own property 18% It is the bank s management is responsible for defining which risks The BANK of Greenland should be able to withstand and therefore which variables require stress testing. In the first instance, the stress tests are an attempt to subject figures in the accounts of The BANK of Greenland to a number of negative events in order to determine how the bank would react in a given scenario. The results of these tests are then included in the solvency requirement model in such a manner that The BANK of Greenland, as a minimum, needs to maintain capital robust enough to cover a deficit that would appear in the event that the scenario in question were real. The overall effect of the stress test on the solvency requirement is calculated by including the impact of the profit (or loss) on the bank in relation to weighted items. In this manner, a measure for the amount of capital needed for the bank to survive the scenario in question is calculated. Apart from the areas of risk included in the stress test, there are many risks that The BANK of Greenland has found relevant to include in its evaluation of its solvency requirement. Other risks evaluated when determining the solvency requirement: Further capital to cover credit risks Growth in loans and advances 100 largest exposures Customers sufferring from financial difficulties Geographic concentration Commercial concentration Concentration of collateral Unexploited credit facilities Retail segmentation Major raw materials projects Further capital to cover market risks Capital for operational risk 11/19

12 SOLVENCY REQUIREMENT AND CAPITAL BASE ADEQUACY Further capital to cover other risks Strategic risks Reputational risks Risks related to the bank s size Real property risks Capital acquisition Liquidity risks Winding down risks External risks associated with legislation and compliance Other recruitment, method risk, etc. The determination of the impact these risks have on the solvency requirement are either calculated directly from supplementary calculations or evaluated by the management as impacting the solvency requirement. The risk factors included in the model are, in the opinion of The BANK of Greenland, sufficient to cover all the risk required by legislation that the bank s management is required to take into account when determining its solvency requirement as well as the risks that the management decides The BANK of Greenland has incurred. Furthermore, the Board of Directors as well as the Board of Management evaluates the extent to which the capital base at the bank is sufficient to support coming activities. At The BANK of Greenland, this evaluation is part of the general determination of the bank s solvency requirement. The management evaluates on an on-going basis, and at least once a year, the manner in which expectations for growth impact the calculation of the solvency requirement. In concrete terms, this means that the management must estimate future growth rates, the average solvency weight of this growth and the margin of earnings after tax. Solvency Margin at the End of September 2013 Capital base after deduction DKr. 785,002,000 Capital adequacy DKr. 389,686,000 Solvency margin in DKr. DKr. 395,316,000 Solvency ratio 20.8% 20.8% Solvency requirement 8+ model 10.4% Solvency requirement probability model 9.3% Solvency margin in percentage points 10.4% 11.5% As of 2013, the method of calculation for individual solvency requirements has been changed to the 8+ model. This calculation is based on 8% to which extra information may be added, e.g. customers suffering from financial difficulties. 12/19

13 SOLVENCY REQUIREMENT AND CAPITAL BASE ADEQUACY The BANK of Greenland's Calculated Capital and Solvency Requirements; Old and New Model DKr 1,000 Probability Model Credit Reserve Model (8+) Capital Requirement Solvency Requirement Capital Requirement Solvency Requirement Credit Risk 309, % Market Risk 29, % Operational Risk 48, % Other -36, % Ordinary Risk 301, % Special Credit Risk 63, % Market Risk 11 0,00 % Operational Risk 10, % Other 15, % Capital and Solvency Requirement 350, % 389, % The new solvency rules are not yet in force in Greenland. However, the bank intends to follow them. Until these rules come into force, the bank will calculate its solvency requirements by means of the Probability Model as well as the Credit Reserve Model. 13/19

14 COUNTERPART RISK Counterpart Risk - Derivatives The BANK of Greenland employs the market value method to calculate counterpart risk in order to calculate the size of an exposure and the risk-weighting of derivatives. The market value method is described below, and it follows the description in appendix 16 of the Executive Order on Capital Adequacy. The market value method includes the market value of contracts with a positive market value and the principal of all contracts in the Executive Order on capital adequacy. The market value of these contracts is included with the weights of these contracts maturity and with the weight of their counterparts. Since The BANK of Greenland only uses derivatives to cover open items on fixed interest loans, the positive market value of these derivatives has no impact on the determination of an adequate capital base. When the bank enters into a loan agreement and during the ordinary process of monitoring exposures, the calculated exposure value of the loan is taken into account so that the bank can be sure that it does not exceed the credit line made to the bank s counterpart. The value of the bank s total counterpart risk, calculated according to the market value method, is DKr m at the end of September /19

15 MARKET RISK Market Risk Calculation of solvency risks in the area of market risks. Risks related to trading portfolios in DKr. 1,000 Weighted amount: At the end of Q At the end of 2012 Instruments of debt 167, ,996 Shares, etc. 31,980 30,676 Unit trusts 43,704 36,648 Currency positions 33,226 54,687 Total items with a market risk 276, ,007 15/19

16 EXPOSURE TO INTEREST RISK, ETC. NOT INCLUDED IN THE BANK S TRADING PORTFOLIO Exposure in Shares, etc. not included in the Trading Portfolio In cooperation with other credit institutions, The BANK of Greenland has acquired shares in a number of sector companies. The purpose of these companies is to support credit institutions within the fields of payment transfers, IT, pension, unit trusts, etc. The BANK of Greenland has no plans to sell these shares since participation in these companies is considered a necessity for operating a local bank. Their shares are therefore held outside of the bank s trading portfolios. In several of the sector companies, shares are distributed in such a manner that the credit institutions share will always reflect the individual credit institutions volume of business with the sector company, This distribution will typically start with the sector company s equity. Based on this distribution, The BANK of Greenland regulates the booked value of these shares quarterly, semiannually or annually depending on the frequency of new information from the individual company. On-going regulation is entered in accordance with the rules for the profit and loss account. In other sector companies, their shares are not distributed, but are, on the other hand, typically based on the most recent and known trade. Alternatively, value can be calculated on the basis of an acknowledged valuation method. Regulation of the booked value of these shares is also entered into the profit and loss account. The bank s total position in sector shares amounts to DKr m. Apart from shares in sector companies, The BANK of Greenland also owns unlisted shares in several Greenlandic companies with which the bank has entered into collaboration. These shares are evaluated at cost price with depreciation for any impairment. As with the shares in sector companies, the bank has no plans to sell these shares. The bank s total position in these shares amounts to DKr 1.947m 16/19

17 EXPOSURE TO INTEREST RISK, ETC. NOT INCLUDED IN THE BANK S TRADING PORTFOLIO Exposure to Interest Risk in Positions not included in Trading Portfolios. The bank s exposure to interest risk outside its trading portfolio consists of fixed interest assets. Loans, advances and claims at credit institutions and fixed interest deposits. Deposits and debt to credit institutions. At the end September 2013, The BANK of Greenland has an interest risk on its exposures in positions outside the trading portfolio of DKr 536m. This interest risk is calculated daily. 17/19

18 CREDIT RISK Credit Risk The accounting definitions of non-performing loans and impaired claims as well as a description of the methods employed to establish value regulation and impairments, can be found in the Danish Executive Order on Financial Reports for Credit Institutions, Investment Companies, etc. sections Weighted items including credit, counterpart, dilution and delivery risks amount to a total of DKr 3, m after impairments. Distribution according to Line of Business as at the End of September 2013 Impaired claims and impairments according to line of business (DKr 1,000) Impaired claims individually evaluated Individual Impairments/ Provisions for loss for the year Public Authority Agriculture, hunting, forestry and fishing 8,418 6,609 0 Industy and mining 1,028 1,028 0 Energy supply Construction companies 67,825 17,344 0 Trade 8,724 3, Transportation, hotels and restaurants 17,157 2,009 0 Information and communication Financial services and research Real estate 0 0 1,146 Other businesses 14,469 2,348 0 Total commercial activities 117,621 32,745 1,888 Retail customers 62,883 34, Total 180,504 67,211 2,009 Group impairments, amounting to a total of DKr 7.704m have not been included in the above summary of impairments/provisions for loss. The accounting definition of impaired claims can be found in the Danish Executive Order on Financial Reports for Credit Institutions, Investment Companies, etc. section 52, sub-section 3. 18/19

19 CREDIT RISK Movements of impaired claims as a consequence of value adjustment and impairments at the end of Septemner 2013: DKr. 1,000 Individual impairments/provisions for loss Group impairments/provisions for loss Loans Guarantee debitors Loans Guarantee debitors Accumulated impairments/provisions for loss at the start of the period on loans and guarantee debitors 49, ,528 0 Financial movements during the year: Impairments/provisions for loss during the year 19,156 8,105 1,466 0 Reversal of previous years impairments/provisions for loss taken in previous years, where there is no longer any objective indication of impairment or the impairment has been reduced. 7, ,319 0 Other movements Final loss (depreciated)previously individually impaired/provided 1, Accumulated impairments/provisions for loss at the end of the period on loans and guarantee debitors. 58,883 8,328 8,675 0 The sum of loans and guarantee debitors where individual impairments /provisions for loss (calculated before impairments/provisions for loss) have been made. 136,383 44,121 2,842, ,864 19/19