Risk and Capital Adequacy Report at the end of GER No

Transcription

1 Risk and Capital Adequacy Report at the end of 2014 GER No

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 8 Risk on capital base 8 2. Capital base 9 3. Solvency requirements and capital base adequacy 10 - including a description of internal processes and solvency need model 4. Counterpart risk Market risk Exposure in shares, etc. not included in the bank's trading portfolio Exposure to interest rate risk in positions not included in the bank's trading portfolio Credit risk 17 2/18

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 keeps a watchful eye on the bank's risks and tales steps to follow up on developments. The Board of Directors has established a general framework as well as a set of principles for the various areas of risk. The bank maintains an ongoing process for developing tools for identifying and managing risks. The Board of Management is responsible for the risk management. 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 of loss as a result of debtors or counterparts defaulting on payment obligations incurred. Market risk: Risk of loss as a result of the current cost of financial instruments and derivative financial instruments fluctuating as a result of changes in market prices. The BANK of Greenland reckons three types of risks among market risks: Interest rate risk, currency risk and share risk. Liquidity risk: Risk of loss as a result of disproportionate increases in financing costs, the risk that the bank is prevented from maintaining the business model adopted as a consequence of lack of financing/funding or ultimately the risk that the bank cannot honor payment obligations incurred when due as a result of lack of financing/funding Operational risk: Risk that the bank incurs a complete or partial financial loss as a result of inadequate or inappropriate internal procedures, human error, IT systems, etc. Risk on capital base: Risk that the bank cannot comply with the statutory minimum requirements as regards solvency and that it cannot maintain the individual solvency need. 3/18

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 and evaluation of the relation between earning and risk is ongoing in connection with the limitation of losses. 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 credit standing 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. Concentration risk 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 base in accordance with section 145 of the Danish Financial Business Act. 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 2014 End 2013 End 2012 Major exposures number Greater than 20 % of the capital base % of the capital base % of the capital base As a percentage of the capital base /18

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 impairment losses and/or provisions). Lines of business DKK 1,000 Public authorities 340,963 Agriculture, hunting, forestry and fishing 206,481 Industry and extraction of mineral resources 27,531 Energy supply 0 Building and engineering - Construction of buildings 190,180 - Other building and engineering 175,282 Total building and engineering 365,462 Trade 314,129 Transportation, hotels and restaurants - Transportation, postal and courier services 108,675 - Hotels and restaurants 118,291 Total Transportation, hotels and restaurants 226,966 Information and communication 18,015 Financing and insurance 70,890 Total real estate 570,206 Other trades 54,497 Total commercial activities 1,854,177 Retail customers 1,807,632 Total 4,002,772 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. Value 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 advances are also assessed individually. 5/18

6 OBJECTIVES AND RISK POLICIES Loans are written down individually or in groups. Individual impairment losses are effected when an objective indication has been ascertained of reduced ability to pay which results in a reduction of the expected future repayments. Individual impairment losses are effected and assessed centrally by the bank's Credit Department. At the end of 2014, exposures showing an objective indication of impairment amount to DKK million on which write-downs/provisions have been made of DKK 78.4 million. Group impairment losses on the credit risk groups which have not been written down individually are effected using a model prepared by the Association of Local Banks, Savings Banks and Cooperative Banks in Denmark into which The BANK of Greenland's historical losses have been incorporated. These impairment losses amount to a total of DKK 18.6 million. Limits are placed on the amounts available for lending when exposures have been written down individually. Loans are written off when the collateral put up has been realized and there is no longer any reasonable possibility of repayment. Partial write-offs are made when exposures are settled over a lengthy period of time. Interest accrual on loans stops when there is no longer any expectation that the loan will be repaid. Collateral The majority of The BANK of Greenland's loans and advances have been secured by means of liens on real property (private housing, office buildings and other commercial property), liens on movable property (vehicles, operating equipment and the like), liens on fishing rights, liens on securities (shares, bonds and investment certificates), liens on cash deposited in banks, guarantees from other credit institutions or public authorities and by means of exposures to companies and sureties from the companies' owners. Collateral put up is evaluated prudently on the basis of the principle of forced sale. In the evaluation, any special geographical difficulties will be taken into consideration in the event of a forced sale. 6/18

7 OBJECTIVES AND RISK POLICIES Market risk The bank strives to minimize any losses that may occur as a result of e.g. unforeseen developments in the 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. For 2014, the bank's portfolio of shares amounted to DKK million of which DKK million is invested in sector shares. Positions in interest receivables must be kept within a given interest rate risk of a maximum of 3 %. At the end of 2014, the total interest rate risk amounted to 1.3 % of the core capital after deductions. The bank has outsourced the management of its portfolio of bonds to an external manager. The manager 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 2014, when measured by currency indicator 1, amounts to DKK million, or 3.1 % of its core capital after deductions. Calculation and monitoring take place daily and the Board of Management and the Board of Directors receive reports on an ongoing basis based on previously established guidelines. Liquidity risk The BANK of Greenland seeks to maintain an adequate and stable cash flow position and a constant excess cover of 125 % as compared to the statutory requirements. The BANK of Greenland's minimum limit of excess cover is 75 %. At the end of 2014, the bank's excess cover was %. Policy: The bank's cash flow position is managed by maintaining sufficient liquid funds, blue-chip securities, the bank's ability to close market positions and take advantage of lines and committed lines. The BANK of Greenland has a strong capital base and a surplus of deposits. In spite of this, the bank has arranged for a committed line of credit with another credit institution. Calculation and monitoring take place daily and the Board of Management and the Board of Directors receive reports on an ongoing basis based on previously established guidelines. 7/18

8 OBJECTIVES AND RISK POLICIES Operational risk The BANK of Greenland strives to limit its operational risks continuously with due regard for the costs of such limitations. Policy: The bank has prepared policies and a contingency plan for physical disasters and IT shutdowns. The bank's IT operations are run from Bankernes EDB Central (BEC), located in Denmark. The bank closely observes the recommendations and instructions issued by BEC and the bank does not develop its own IT systems. Internal procedures are based on written procedures and work descriptions and checks are performed across the organization. The bank continuously assesses outsourcing of areas of operation that are not of importance for the bank's competitiveness. At the end of 2014, the bank has outsourced the following areas. Internal auditing Clearing Balances with debtors and creditors Foreign payments Securities customer orders Risk on capital base The BANK of Greenland has a strong capital base and a capital ratio at the end of 2014 of 20.3 %. The statement of changes in equity has been made according to the new rules of the CRR regulation. At the end of 2013, the bank's capital adequacy ratio was 21.0 %. Calculation and monitoring take place monthly and the Board of Management and the Board of Directors receive reports on an ongoing basis based on previously established guidelines. 8/18

9 CAPITAL BASE Statement of capital base at the end of 2014 in DKK 1,000 Capital structure Equity 909,872 Revaluation reserve 16,547 Actual core capital 893,325 Capital base 893,325 The bank has not raised supplementary, government hybrid or other subordinate loan capital. 9/18

10 SOLVENCY REQUIREMENTS 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 needs. Determination of the solvency need is constantly being evaluated by the Board of Directors and the Board of Management. These discussions are based on a memo containing a proposal on the size of the internal capital (solvency need). On the basis of the discussions, the Board of Directors reaches a decision on the calculation of the bank's internal capital (solvency need) that must be sufficient to cover the bank's risks and support present and future activities. The memo is prepared by the Finance Manager. Furthermore, the Board of Directors has thorough discussions at least once a year on the method for calculating the bank's internal capital (solvency need), including the risks and stress levels that should be taken into account when calculating the internal capital (solvency need). The internal capital (solvency need) is calculated on the basis of an 8+ method that includes the types of risk that are in the bank's opinion required to have capital cover: credit risk, market risk, operational risks and other risks as well as additions as a result of statutory requirements. The assessment is based on the bank's risk profile, overall capital structure as well as forward-looking considerations, including the budget. The Danish Financial Supervisory Authority has issued "Guidelines on Capital Base Adequacy and Solvency Needs for Credit Institutions". In addition, the Association of Local Banks, Savings Banks and Cooperative Banks in Denmark has issued a solvency need model which is based on the 8+ method. This is based on the minimum requirement of 8 % of the risk-weighted items (the Pillar 1 requirement) with the addition of risk and matters that are not fully reflected in the statement of risk-weighted items. Furthermore, the Danish Financial Supervisory Authority has outlined benchmarks which show when basically the FSA finds that additions in the solvency need must be reserved where Pillar I is not sufficient for the individual risk areas In addition to the benchmarks and risk areas that are outlined by the Danish Financial Supervisory Authority, the bank assesses in all areas whether the benchmarks stated are sufficient for The BANK of Greenland. Other risk areas that are assessed relation to the determination of the solvency need: Retail segmentation The mineral resources area External risks related to legislation and compliance Other matters - recruitment, method risk, etc. The determination of the impact these areas have on the solvency need ratio is either calculated directly from supplementary calculations or assessed on a discretionary basis by the management as impacting the determination of the solvency need. The risk factors included in the model are, in the opinion of The BANK of Greenland, sufficient to cover all the risk areas that the bank's management is required by legislation to take into account when 10/18

11 SOLVENCY REQUIREMENTS AND CAPITAL BASE ADEQUACY determining the solvency need as well as the risks that the management finds that The BANK of Greenland has taken on. Furthermore, the Board of Directors and the Board of Management must assess whether the capital base is sufficient to support coming activities. The bank observes the template below when calculating the internal capital (solvency need) DKK 1,000 % 1) The Pillar I requirement (8 per cent of the total risk exposure) 8 + 2) Earnings (capital to cover risk as a result of weak earnings) + 3) Loan growth (capital to cover organic growth in business volume) + 4) Credit risks, of which 4a) Credit risks on large customers with financial problems 4b) Other credit risks 4c) Single name concentration risk 4d) Sector concentration risk + 5) Market risks, of which 5a) Interest rate risks 5b) Share risks 5c) Currency risks + 6) Liquidity risks (capital to cover more expensive liquidity) + 7) Operational risks (capital to cover operational risks apart from Pillar I) + 8) Gearing (capital to cover risks as a result of high gearing) + 9) Additions, if any, as a result of statutory requirements Total = capital requirements/solvency needs - Of which credit risks (4) - Of which market risks (5) - Of which operational risks (7) - Of which other risks ( ) - Of which additions as a result of statutory requirements (1+9) The total risk exposure - 11/18

12 SOLVENCY REQUIREMENTS AND CAPITAL BASE ADEQUACY The BANK of Greenland's made up individual capital requirement according to the 8+ model In DKK 1, Capital requirement Solvency need Capital requirement Solvency need Pillar I requirement 325, % 308, % Credit Risk 62, % 64, % Market risk % % Operational risk 5, % 10, % Other risk 11, % 19, % Capital requirement and solvency need 414, % 402, % The bank has on the basis of the capital requirement calculated an immediate excess cover of DKK million which constitutes the difference between the present capital requirement (solvency need) and the actual capital (capital ratio) Excess cover at the end of 2014 Capital base TDKK. 825,807 Sufficient capital TDKK 414,505 Excess cover TDKK 411,302 Capital ratio 20.3 % 21.0 % Internal capital requirement (solvency need) 10.2 % 10.4 % Solvency excess cover as a percentage point 10.1 % 10.6 % 12/18

13 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 the contracts is included with the weights of the terms of these contracts and with the weight of the counterparts in question. Since The BANK of Greenland only uses derivatives to cover open items on fixed-interest loans, the positive market value of the derivatives has no impact on the determination of the adequate capital base. In the bank's process of granting a loan and during the ordinary process of monitoring exposures, the calculated exposure value of the loan is taken into account so that it is ensured that it does not exceed the credit line granted to the counterpart. The value of the bank's total counterpart risk, calculated according to the market value method, is DKK million at the end of /18

14 MARKET RISK Market risk Calculation of solvency risks in the area of market risks Risks related to the trading portfolio in DKK 1,000. Weighted amounts: At the end of 2014 At the end of 2013 Debt instruments 94, ,207 Shares, etc. 0 31,730 Collective investment funds 0 61,700 Foreign exchange positions 22,768 33,226 Total items with market risk 117, ,863 14/18

15 EXPOSURES IN SHARES, ETC. NOT INCLUDED IN THE BANK'S TRADING PORTFOLIO Exposures in shares, etc. not included in the bank's 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 sector companies is to support the business of the credit institutions within the fields of payment transfers, IT, pension, investment funds, etc. The BANK of Greenland has no plans to sell these shares since participation in these sector companies is considered a necessity for operating a local bank. Their shares are therefore held outside of the bank's trading portfolio. In several of the sector companies the shares are redistributed so that the shares of the credit institutions always reflect the individual credit institution's volume of business with the sector company. Typically, the redistribution is effected on the basis of the equity value of the sector company. In the light of this, The BANK of Greenland adjusts the carrying value of these assets quarterly, semi-annually or annually depending on the frequency of new information from the individual sector company. The ongoing adjustment is booked in accordance with the rules via the income statement. In other sector companies, the shares are not redistributed, but are, on the other hand, typically measured based on the most recent known trading; alternatively the value is calculated on the basis of an accepted valuation method. Adjustments of the carrying value of the shares in these companies are also booked via the income statement. The bank's total position in sector shares amounts to DKK million. Apart from shares in sector companies, The BANK of Greenland owns unlisted shares in a few enterprises in Greenland with which the bank has entered into collaboration. These shares are measured at cost less any impairment losses. 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 DKK million. 15/18

16 EXPOSURES TO INTEREST RATE RISK IN POSITIONS NOT INCLUDED IN THE BANK'S TRADING PORTFOLIO Exposures to interest rate risk in positions not included in the bank's trading portfolio The bank's interest rate risk for exposures in positions outside the trading portfolio consists of fixed-rate assets: Loans, advances and accounts receivable from credit institutions and fixed-rate deposits. Deposits and debt to credit institutions At the end of 2014, The BANK of Greenland has an interest rate risk on exposure in positions outside the trading portfolio of DKK million. The interest rate risk is calculated daily. 16/18

17 CREDIT RISK Credit risk The accounting definitions of defaulted receivables and impaired receivables as well as a description of the methods employed to determine value adjustments and impairment losses, are available in sections of the Executive Order on Financial Reports for Credit Institutions and Investment Firms, etc. etc. The total risk exposures with credit, counterpart, dilution and delivery risk amount to a total after impairment losses of DKK 3, million at the end of Distribution by sector/line of business at the end of 2014 is as follows: Impaired receivables and impairment losses broken down by sector/line of business. DKK 1,000 Impaired receivables. assessed individually Individual impairment losses/ provisions Losses for the year Public authorities 13, Agriculture, hunting, forestry and fishing 10,346 5, Industry and extraction of mineral resources 13,451 1, Energy supply Building and engineering 88,148 22, Trade 20,631 3,747 0 Transportation, hotels and restaurants 25, Information and communication Financing and insurance Real estate 18, Other trades 8, Total commercial activities 185,510 34,513 1,966 Retail customers 157,313 43,912 6,131 Total 356,029 78,425 8,097 Group impairment losses which amount to a total of DKK million at the end of 2014 have not been included in the above statement of impairment losses/provisions. The accounting definition of impaired receivables can be found in section 52(3) of Executive Order on Financial Reports for Credit Institutions and Investment Firms, etc. 17/18

18 CREDIT RISK Movements of impaired receivables as a consequence of value adjustments and impairment losses at the end of DKK 1,000 Individual impairment losses/provisions Group impairment losses/provisions Loans Guarantee debtors Loans Guarantee debtors Accumulated impairment losses/provisions at the beginning of the year on loans and guarantee debtors 57,359 8,749 10,626 0 Movements during the year: Impairment losses/provisions during the year 24,945 3,324 8,527 0 Reversal of impairment losses effected/provisions made in previous financial years where there is no longer objective evidence of impairment or the impairment has been reduced. 7, Other movements Final loss (depreciated) previously depreciated/provided for individually 7, Accumulated impairment losses/provisions at the end of the year on loans and guarantee debtors 66,664 11,760 18,551 0 Sum of loans and guarantee debtors that have been individually written down/for which provisions have been made individually (calculated before impairment losses/provisions) 133,495 38,475 2,766,267 1,064,535 18/18