Financial risk management

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1 The Bank s business involves taking on risks in a targeted manner and managing them professionally. The core functions of the Bank s risk management are to identify all key risks for the Bank, measure these risks, manage the risk positions and determine capital allocations. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice. The Bank s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank s financial performance. The Bank defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors. Risk management is carried out by the Bank Risk Management under policies approved by the Board of Directors. Bank Risk Management identifies, evaluates and hedges financial risks in close co-operation with the operating units of the Bank. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments. In addition, the Internal Audit and Compliance is responsible for the independent review of risk management and the control environment. The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate risk and other price risk. 3.1 Credit risk Credit risk is the risk of suffering financial loss, should any of the Bank s customers, clients or market counterparties fail to fulfil their contractual obligations to the Bank. Credit risk arises mainly from commercial and consumer loans and advances, credit cards, and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, financial guarantees, letters of credit, endorsements and acceptances. The Bank is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities ( trading exposures ), including non-equity trading portfolio assets, derivatives and settlement balances with market counterparties and reverse repurchase loans. Credit risk is the single largest risk for the Bank s business; the directors therefore carefully manage the exposure to credit risk. The credit risk management and control are centralized in a credit risk management team, which reports to the Board of Directors and head of each business unit regularly Credit risk measurement (a) Loans and advances (including loan commitments and guarantees) The estimation of credit exposure is complex and requires the use of models, as the value of a product varies with changes in market variables, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Bank has developed models to support the quantification of the credit risk. These rating and scoring models are in use for all key credit portfolios and form the basis for measuring default risks. In measuring credit risk of loan and advances at a counterparty level, the Bank considers three components: (i) the probability of default (PD) by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derive the exposure at default (EAD); and (iii) the likely recovery ratio on the defaulted obligations (the loss given default ) (LGD). The models are reviewed regularly to monitor their robustness relative to actual performance and amended as necessary to optimise their effectiveness. (i) Probability of default The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgement. They are validated, where appropriate, by comparison with externally available data. The Bank s rating method comprises 4 rating levels for loans. The rating methods are subject to an annual validation and recalibration so that they reflect the latest projection in the light of all actually observed defaults. The Bank s internal ratings scale and mapping of external ratings as supplemented by the Bank s own assessment through the use of internal rating tools are as follows: The Bank utilizes an internal risk system rating based on a scale of 1 to 10. A risk rating of «1» identifies obligors or transactions of the highest quality or lowest risk. A risk rating of «10» is assigned to obligor s or transactions of lowest quality or highest risk. The table below provides a grid showing comparisons between the risk rating system of Ecobank and the rating scale used by Standard & Poor s

2 Investment quality Ecobank S & P Definition 1 AAA Largely risk free 2 AA Exceptional credit / Minimal risk 3 A Excellent credit / very low risk 4 BBB Good credit quality / low risk 5 BB Satisfactory credit quality Investment Grade 6 B Acceptable credit quality but less stable 7 CCC Risk factors deteriorating 8 CC Special mention 9 C Substandard credit quality Non Investment Grade 10 D Doubtful / Loss Obligors risk rated 1 to 4 are considered low risk («investment grade»). Those risk rated 5 and 6 are considered as medium risk, while those risk rated 7 through 10 are considered high risk. Medium and high risk obligors are also commonly categorized as «non-investment grade». Risk rating are assigned to individual obligors (obligor risk ratings) and to individual credit facilities (facility risk rating). They are also assigned total facilities extended to an obligor (approval risk rating), to all the facilities extended to a group or related obligors (economic group rating), or to an entire portfolio (portfolio risk rating). (ii) Exposure at default ( EAD ) EAD is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur. (iii) Loss given default / Loss severity Loss given default or loss severity represents the Bank s expectation of the extent of loss on a claim should default occur. It is expressed as a percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. The measurement of exposure at default and loss given default is based on the risk parameters standard under Basel II. (b) Debt securities and other bills For debt securities, external rating such as Standard & Poor s rating or their equivalents are used by Bank Treasury for managing of the credit risk exposures as supplemented by the Bank s own assessment through the use of internal ratings tools Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified - in particular, to individual counterparties and Banks, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or Banks of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sector and by country are approved quarterly by the Board of Directors. The exposure to any one borrower including banks and other non-bank financial institutions is further restricted by sub-limits covering onand off-statement of financial position exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Lending limits are reviewed in the light of changing market and economic conditions and periodic credit reviews and assessments of probability of default. Some other specific control and mitigation measures are outlined below:

3 (a) Collateral The Bank takes in addition to the debtor s covenant to repay, tangible assets and/or assurances as security for the loan. The qualities the Bank looks out for in a good collateral are: (i) It should have assurance of title and an ascertainable value which is stable and not subject to undesirable downward valuation. (ii) It should also be marketable, readily realizable without undue cost or difficulties as well as be devoid of all cases of encroachment or encumbrance and lastly, there should be a good margin between the value of the security provided and the amount of facility being sought. (iii) There should be a good margin between the value of the security provided and the amount of facility being sought. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Some other specific control and mitigation measures are outlined below: The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: Mortgages over residential properties. Charges over business assets such as premises, inventory and accounts receivable. Charges over financial instruments such as debt securities and equities. Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances. (b) Lending limits (for derivative and loan books) The Bank maintains strict control limits on net open derivative positions (that is, the difference between purchase and sale contracts) by both amount and term. The amount subject to credit risk is limited to expected future net cash inflows of instruments, which in relation to derivatives are only a fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not always obtained for credit risk exposures on these instruments, except where the Bank requires margin deposits from counterparties. Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank s market transactions on any single day. (c) Master netting arrangements The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of assets and liabilities of the statement of financial position, as transactions are either usually settled on a gross basis or under most netting agreements the right of set off is triggered only on default. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement. (d) Financial covenants (for credit related commitments and loan books) The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit

4 are contingent upon customers maintaining specific credit standards (often referred to as financial covenants). The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments Impairment and provisioning policies The internal and external rating systems described in Note focus on expected credit losses that is, taking into account the risk of future events giving rise to losses. In contrast, impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the reporting date based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements is usually lower than the amount determined from the expected loss model that is used for internal operational management and banking regulation purposes. The impairment allowance shown in the statement of financial position at year-end is derived from each of the four internal rating grades. Current - The facility is deemed current if the payment of both principal and interest are up to date with the agreed terms Watchlist - Principal and interest repayments are overdue between 1 and 90 days Substandard - Principal and interest repayments are overdue by more than 91 days but less than 180 days Loss - Principal and interest repayments are overdue by more than 360 days However, the largest component of the impairment allowance comes from the default grade. The table below shows the percentage of the Bank s on- and off-balance sheet items, like financial guarantees, loan commitments and other credit related obligations, relating to loans and advances and the associated impairment allowance for each of the Bank s internal rating categories Loans and advances Impairment provision Amount % Amount % 1. Current 834, % 9, % 1A. Watchlist 52, % - 0.0% II. Substandard 7, % - 0.0% III. Doubtful 5, % 4, % IV. Loss 30, % 24, % 930, % 38, % 2013 Loans and advances Impairment provision Amount % Amount % 1. Current 574, % 6, % 1A. Watchlist 47, % - 0.0% II. Substandard 4, % 1, % III. Doubtful 20, % 13, % IV. Loss 13, % 12, % 660, % 34, %

5 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements Financial instruments whose carrying amounts do not represent the maximum exposure to credit risk without taking account of any collateral held or other credit enhancements are disclosed in Note 35(c). Concentration of risks of financial assets with credit risk exposure Maximum exposure Credit risk exposures relating to on-balance sheet assets are as follows: Loans and advances to banks 94,430 62,117 Loans and advances to customers: Corporate Bank - Overdrafts 90,782 78,130 - Term loans 438, ,233 - Others - - Domestic Bank - Overdrafts 118,179 80,236 - Credit cards Term loans 240, ,388 - Mortgages 3,384 4,104 Trading assets - Debt securities 52,519 17,881 Derivative financial instruments 22,435 - Investment securities - Debt securities 382, ,743 Other assets 30,676 55,600 Contingent liabilities and commitments are as follows: Loan commitments and other credit related liabilities 392, ,602 At 31 December 1,867,479 1,473, Loans and advances Loans and advances are summarised as follows: Loans and advances to banks 31 December December 2013 Loans and advances to customers Loans and advances to banks Loans and advances to customers Neither past due nor impaired 94, ,799 62, ,175 Past due but not impaired - 52,543-47,368 Impaired - 43,614-39,187 Gross 94, ,956 62, ,730 Less: allowance for impairment - (38,235) - (34,823) Net 94, ,721 62, ,907

6 (a) Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank. 31 December 2014 Loans and advances to customers Corporate Bank Domestic Bank Over drafts Term loans Others Over drafts Credit cards Term Loans Mortgages Total 1. Current 86, ,246-58, ,032 3, ,799 IA. Watchlist 3, , ,543 Total 89, , , ,032 3, ,342 Fair value of collateral 81, , , ,243 4, ,649 Amount of under/(over) collateralization 8, ,983 - (119,246) ,789 (912) 123,692 Mortgage loans in the sub-standard class were considered not to be impaired after taking into consideration the recoverability from collateral. 31 December 2013 Loans and advances to customers Corporate Bank Domestic Bank Grades: Over drafts Term loans Others Over drafts Credit cards Term Loans Mortgages Total Over drafts Credit cards Term Loans Mortgages Total 1. Current 70, ,232-40, ,026 4, ,175 IA. Watchlist 7, , ,368 Total 78, ,232-80, ,026 4, ,543 Fair value of collateral 53, ,538-55, ,833 4, ,629 Amount of under/(over) collateralization 24,190 87,694-24, , ,914 (b) Loans and advances past due but not impaired Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired. Therefore, loans and advances less than 90 days past due are not usually considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to customers that were past due but not impaired were as follows: 31 December 2014 Loans and advances to customers Corporate Bank Domestic Bank Over drafts Term loans Others Over drafts Credit cards Term Loans Mortgages Total Past due up to 30 days Past due days 2, , ,388 Past due days , ,505 Total 3, , ,543 Fair value of collateral 18, , ,954 Amount of under\(over) collateralisation (15,157) , , December 2013 Loans and advances to customers Corporate Bank Domestic Bank Over drafts Term loans Others Over drafts Credit cards Term Loans Mortgages Total Past due up to 30 days , ,267 Past due days , ,388 Past due days 7, ,698 41,505 Total 7, , ,368 Fair value of collateral 6, , ,260 Amount of under collaterization , ,108

7 c) Loans and advances individually impaired (i) Loans and advances to customers The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is N28.9 billion (2013: N39.2 billion). The breakdown of the gross amount of individually impaired loans and advances by class are as follows: 31 December 2014 Loans and advances to customers Corporate Bank Domestic Bank Over drafts Term loans Others Over drafts Credit cards Term Loans Mortgages Total Individual impaired loans 5, , ,403-43,614 Impairment allowance 4,593 7,720-22, , ,235 Fair value of collateral 2, ,174-5,108-20, December 2013 Individual impaired loans 1,334 3,214-27, ,049-39,189 Impairment allowance 2,055-4,918 20, , ,823 Fair value of collateral 92 1,198-6,579-7,429-15,298 (ii) Loans and advances to banks The total amount of individually impaired loans and advances to banks as at 31 December 2014 was nil (2013: nil). (d) Industry sectors The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorised by industry sector as of 31 December For this table, the Bank has allocated exposures to industry based on the sector of industry of our counterparties N'millions N'millions Agriculture 76,069 49,131 Oil and gas 163, ,000 Capital market 18,295 7,072 Consumer credit 55,903 44,790 Trade 152,235 41,317 Services & Others 27,323 18,712 Manufacturing 102,184 61,132 Mining and quarrying 17,579 11,167 Mortgage 3,462 7,884 Real estate and construction 46,060 47,603 Finance and insurance 19,992 39,706 Government 58,487 42,347 Power 34,088 23,616 Public Utilities 89,900 - Transportation 27,060 19,074 Communication 36,289 48,141 Education 2,136 2,038 (e) Geographical sectors 930, ,730 The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorised by geographical region as of 31 December For this table, the Bank has allocated exposures to regions based on the location of our counterparties.

8 N'millions N'millions Nigeria South south 112,480 72,071 South west 673, ,800 South east 13,619 10,976 North west 15,689 8,721 North central 76,337 49,808 North east 1,516 1,122 Outside Nigeria 38,013 73,233 Impaired loans and advances by Industry 930, ,730 Agriculture 1, Oil and gas 2,673 6,048 Capital market 11, Consumer credit Trade 2,302 2,218 Services & Others 4, Manufacturing 4,352 1,796 Mining and quarrying Real estate and construction 10, Finance and insurance 3,144 23,315 Government - 70 Power Transportation 3,217 2,624 Communication Education 59 1 Impaired loans and advances by Geography 43,614 39,189 Nigeria South south South west 40,002 36,181 South east North west North central 2,657 2,610 North east Outside Nigeria ,614 39,189

9 (e) Quality of credit The Bank s internal rating scale and mapping of external ratings as supplemented by the Bank s own assessment through the use of internal rating tools to determine the quality of risk assets as follows: Rating Total exposure Rating Total exposure AAA 2,624 AAA 4,486 A 115,515 A 32,294 BBB 55,802 BBB 52,152 BB 81,679 BB 61,583 B 538,181 B 369,812 CCC 42,814 CCC 54,964 CC 50,727 CC 46,250 C 7,181 C 8,497 D 36,433 D 30,692 Grand Total 930, , Repossessed collateral The Bank obtained assets by taking possession of collateral held as security. The nature and carrying amounts of such assets at the reporting date are as follows: Nature of assets Carrying amount Carrying amount Collateral Related Loan Collateral Related Loan Residential property Commercial property Vehicle and equipment Others Repossessed properties are sold as soon as practicable, with the proceeds used to reduce the outstanding indebtedness. Repossessed property is classified within other assets. 3.2 Market risk Market risk is the risk of losses in on and off-balance sheet positions arising from movements in market prices. It is the risk that the value of assets and liabilities will be adversely affected by the movement in the value of financial instruments. These movements arise from fluctuations in interest rates, foreign exchange rates, equities and commodities prices. This risk is inherent in financial instruments associated with our operations and/or activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our traditional banking business, customer and proprietary trading operations, ALM process and credit risk mitigation activities. In the event of market volatility, factors such as underlying market movements and liquidity have an impact on the results of the Bank. Our traditional banking loan and deposit products are non-trading positions and are reported at amortized cost for assets or the amount owed for liabilities (historical cost). However, these positions are still subject to changes in economic value based on varying market conditions, primarily changes in the levels of interest rates. The risk of adverse changes in the economic value of our non-trading positions is managed through our Asset & Liability Management and Market Risk activities. Our trading positions are reported at fair value with changes currently reflected in income. Trading positions are subject to various risk factors, which include exposures to interest rates and foreign exchange rates, as well as issuer and market liquidity risk factors. We seek to mitigate these risk exposures by using techniques that encompasses a variety of financial instruments in both the cash and derivatives markets Market risk management and control framework Ecobank Nigeria Limited (ENG) has put in place a robust and clearly defined market risk management framework, which essentially provides the Board of Directors and Management with guidance on market risk management processes. All teams involved in the management and control of market risk are required to fully comply with the policy statements to ensure the Bank is not exposed to market risk beyond the qualitative and quantitative risk tolerances. The Management Risk Committee (MRC) ensures that all market and liquidity risk management decisions by the Board are implemented by

10 Management. They also recommend to the Board, approvals for amendments to the market & liquidity risk policies when necessary. The Asset & Liability Committee (ALCO) manages market and liquidity risk across the Bank and meets monthly to review, approve and make recommendations concerning the risk profile including limits and utilization. The Bank s liquidity management framework is designed in accordance with regulatory requirements. While the Asset & Liability Management (ALM) Team ensures that the Bank is liquid at all times to meet funding requirements and payment obligations as they fall due under normal and unusual markets situations without incurring additional cost. A dedicated market risk team, independent of the trading and business units, is responsible for implementing the market risk control framework and assumes day-to-day responsibility for market risk management. A limit framework is set within the context of the approved market risk appetite while daily market risk dashboard and stress testing reports are generated. The control framework covers the following principles: Clearly defined responsibilities and authorities for the primary groups involved in market risk management in the Bank; Daily monitoring, analysis and reporting of market risk exposures against approved limits; Clearly defined limit structure and escalation process in the event of a market risk limit excess; A market risk measurement methodology that captures diversification effects and allows aggregation of market risk across risk types, markets and business lines; Use of VaR at 99% confidence Interval as a measure of the one-day market risk exposure of all trading positions; Use of non-var based limits and other controls such as duration limit; Use of stress testing and scenario analysis to support the market risk measurement and risk management process by assessing how portfolios perform under extreme market conditions; Use of back-testing as a diagnostic tool to assess the accuracy of the VaR model and other risk management techniques; and A product approval process that requires market risk teams to assess and quantify market risks associated with proposed new products Trading Risk Management Trading-related revenues represent the amount earned from trading activities, which are taken in a diverse range of financial instruments and markets. Trading account assets and liabilities positions are reported at fair value. Trading-related revenues can be volatile and are largely driven by general market conditions and customer demand. Trading-related revenues are dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment. The ALCO is the primary governance authority for Trading Risk Management and it takes a forward-looking view of the market risks impacting the Bank and prioritize those that need a proactive risk mitigation strategy. The graph below depicts the daily level of net trading (inclusive of sales) income for the 12 months ended December 31, 2014 as compared with the 12 months ended December 31, During the 12 months ended December 31, 2014, net positive trading income was recorded during the year even though the markets experienced increased volatility towards the end of the year driven by rising macro-economic risk levels Net Trading Income (N MM) Jan-14 Feb-14 Mar-14 Apr-14 May Jun-14 Jul Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

11 The objective of market risk measurement is to manage and control market risk exposures within acceptable limits while optimizing the return on risk. The Bank does not trade in commodities and equities, but is exposed to risks arising from the assets in transactions where these have been used as collateral for credit transactions. The latter is covered under credit risk management (a) Value at risk To evaluate risk in our trading activities, we focus on the actual and potential volatility of individual positions as well as portfolios. VaR is a key technique used by the Bank to measure market risk and it represents the worst loss the portfolio is expected to experience based on historical trends and under normal conditions. Our VaR model uses a historical simulation approach based on minimum three years of historical data and assumes a 99 percent confidence level. Statistically, this means that losses will exceed VaR, on average, 1 out of 100 trading days, or two to three times each year. The Bank s VaR measurements are not additive as there are both correlation and diversification effects included in the model. The VaR model is an effective tool in estimating ranges of potential gains and losses on our trading portfolios. There are however many limitations inherent in a VaR model as it utilizes historical results over a defined time period to estimate future performance. Historical results may not always be indicative of future results and changes in market conditions or in the composition of the underlying portfolio could have a material impact on the accuracy of the VaR model. As such, from time to time, the assumptions and historical data underlying our VaR model is updated. The table below shows the trading VaR of the Bank during the 2014 FY. During the year, treasury bills recorded the highest VaR driven by the Bank s strategy of maintaining more of the lower duration assets in view of the highly volatile nature of the nation s financial markets. One-Day Daily Trading VaR at 90% Confidence Interval 2014 Average High Low Actual* Risk categories Figures in thousands of Naira Bond 100, ,479 4,583 30,990 Tbill 217, ,608 19,084 42,098 FX 5,602 12, , Average High Low Actual* Risk categories Figures in thousands of Naira Bond 47, ,062 1,167 15,346 Tbill 124, ,012 2,001 80,442 FX 3,395 8, ,224 *This represents actual one-day VaR as at 31 December, 2013 In order to verify that the results acquired from VaR calculations are consistent and reliable, the model is always backtested. Backtesting is an integral part of VaR reporting in ENG s risk Management processes. Backtesting is a procedure where actual profits and losses are compared to projected VaR estimates aimed at ensuring that the model yields accurate risk estimates. (b) Stress tests Since the very nature of a VAR model suggests results can exceed our estimates, we also stress test our portfolio. Stress testing estimates the value change in our trading portfolio that may result from abnormal market movements. Historical scenarios simulate the impact of price changes which occurred during a set of extended historical market events. Hypothetical scenarios simulate the anticipated shocks from predefined market stress events. These stress events include shocks to underlying market risk variables, which may be well beyond the shocks found in the historical data used to calculate the VAR. In addition to the value afforded by the results themselves, this information provides senior management with a clear picture of the trend of risk being taken given the relatively static nature of the shocks applied. The results of stress scenarios are reported to Senior Management and reviewed by the Board of Directors Foreign exchange risk Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in other currencies. The types of instruments exposed to this risk include foreign currency-denominated loans and securities, future cash flows in foreign currencies arising from foreign exchange transactions, foreign currency-denominated debt and various foreign exchange derivative instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates. Hedging instruments used to mitigate foreign exchange risk in the balance sheet include currency swaps, forwards as well as foreign currency denominated debt and deposits. Concentrations of currency risk on- and off-balance sheet financial instruments

12 As at 31 December 2014 Dollar Euro CFA Naira Gh. Cedi Others Total Assets Cash and balances with central banks 4, , ,256 Cash and balances with other banks 52,829 9, , ,502 94,432 Loans and advances to customers 407, , ,721 Trading assets , ,519 Investment securities 30, , ,293 Derivative financial instruments 22, ,436 Pledged assets , ,659 Other assets 16, , ,676 Total financial assets 534,727 9, ,155, ,353 1,704,991 Dollar Euro CFA Naira Gh. Cedi Others Total Liabilities Deposits from banks 91, , ,200 Due to customers 490,491 16, ,819-4,396 1,251,016 Derivative financial instruments 3, ,221 Borrowed funds 86, , ,653 Other liabilities 26,440 1, , ,757 Total financial Liabilities 697,598 17, , ,850 1,571,847 Net on-balance sheet financial position (162,871) (7,702) , (497) 133,142 Net off-balance sheet financial position 171,899 7,756-99, ,446 As at 31 December 2013 Total financial assets 312,794 6, ,073, ,394,590 Total financial liabilities 242,108 9,987-1,047,285-3,069 1,302,449 Net on-balance sheet financial position 70,686 (3,056) ,692 9 (2,474) 92,141 Net off-balance sheet financial position (21,321) 5,513-88, , Foreign exchange risk sensitive analysis The foreign currency risk sensitivity analysis reflects the expected financial impact in Naira equivalent resulting from a 5% adverse movement in exchange rates. The foreign exchange rate sensitivity analysis reflects a potential loss of N0.39 billion and gain of N2.8 million for USD and Euro Aggregate Net Open Positions respectively. The aggregate FX position for the Bank was $44.8million, which is the equivalent of about 4.3% of shareholders funds Interest rate risk Interest rate risk represents one of the most significant market risk exposure to our non-trading exposures. Our overall goal is to manage interest rate risk so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the potential volatility in our net interest income caused by changes in market interest rates. Client facing activities, primarily lending and deposittaking create interest rate sensitive positions on our balance sheet. Interest rate risk from these activities, as well as the impact of changing market conditions, is managed through our ALM and Market risk activities. Simulations are used to estimate the impact on net interest income using numerous interest rate scenarios. These simulations enable the Bank to estimate its Interest Rate Risk in the Banking Book (IRRBB) in line with Basel II/III requirements. A key aspect of the IRRBB is the Economic Value of Equity (EVE), which is used to show the effect of different interest rate changes on the Bank s capital. We continually monitor our balance sheet position in an effort to maintain an acceptable level of exposure to interest rate changes. We prepare forward-looking forecasts of net interest income, measure and evaluate the impact that alternative interest rate scenarios have on the static baseline forecasts in order to assess interest rate sensitivity under varied conditions

13 The repricing gap analysis as of December 2014 is presented below: As at 31 December 2014 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Non-interest bearing Total Assets Cash and balances with central banks 36, , ,256 Cash and balances with other banks 94, ,430 Loans and advances to customers 288,284 81, , ,079 93, ,721 Trading assets - 52, ,519 Investment securities 14,262 59,013 17,541 47,327 30, ,293 Derivative financial instruments ,873 10, ,436 Pledged assets 14, ,929 4,130 38,076 20, ,659 Other assets - 1,228 29, ,676 Total financial assets 448, , , , , ,402 1,704,989 Liabilities Deposits from banks 29,123 8,356 73, ,200 Due to customers 443, , ,474 3, ,210 1,251,015 Derivative financial instruments 3, ,221 Borrowed funds - - 2,342 24, , ,653 Other liabilities - 49,206 8,934 1, ,756 Total financial liabilities 475, , ,471 29, , ,210 1,571,846 Total interest repricing gap (26,747) 108,771 84, ,623 24,721 As at 31 December 2013 Cash and balances with central banks 78, , ,341 Cash and balances with other banks 60,026 1, ,117 Loans and advances to customers 187, ,467 53, ,613 92, ,907 Trading assets - 5,044 12, ,881 Investment securities-available-for-sale 5,044 8,751 91,236 45,421 72, ,358 Derivative financial instruments Pledged assets 69,476 57,881 23,144 19,739 11, ,386 Other assets , ,600 Total financial assets 400, , , , , ,180 1,394,589 Liabilities Deposits from banks 38,674 23, ,919 Due to customers 641,094 97,536 23,484 2, ,137 1,118,401 Derivative financial instruments Borrowed funds ,089 56,502-58,122 Other liabilities 12, ,643 10, ,007 Total financial liabilities 692, ,847 65,658 13,271 56, ,137 1,302,449 ` Total interest repricing gap (291,845) 89, , , , Interest rate sensitivity A parallel 100 basis points (1%) interest rate increase in the yield curve would increase net interest income by N0.56billion, while a parallel decrease in the yield curves would decrease net interest income by the same amount. 3.3 Liquidity risk Liquidity risk is the risk that the Bank is unable to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity risk management involves forecasting funding requirements and maintaining sufficient capacity to accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, wholesale market-based funding etc.

14 Liquidity risk is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. Name-specific or systemic risk may lead to reductions in levels of interbank lending and may restrict the Bank s access to traditional sources of liquidity or increase the costs of accessing such liquidity Liquidity risk management process The Bank s Asset & Liability Committee (ALCO) is responsible for establishing our liquidity policy as well as approving operating and contingency procedures, and monitoring liquidity on an ongoing basis. Corporate Treasury is responsible for planning and executing our funding activities and strategy. In order to ensure adequate liquidity through the full range of potential operating environments and market conditions, the Bank conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility, and diversity. Key components of this operating strategy include a strong focus on customer-based funding, maintaining direct relationships with wholesale market funding providers, and maintaining the ability to liquefy certain assets when, and if, required. ALCO determines prudent parameters for wholesale market-based borrowing and regularly reviews the funding plan for the Bank to ensure compliance with these parameters The Bank maintains a Liquidity Contingency Funding Plan that is approved annually by ALCO. This plan evaluates our liquidity position under various operating circumstances with the objective of ensuring that the Bank would be able to operate through a period of stress when access to normal sources of funding is constrained. The LCFP is tested every six months and the results form part of inputs that are utilized for liquidity stress testing. The Bank maintains a cushion of excess liquidity that would be sufficient to fully fund its operations for an extended period during which funding from normal sources may be disrupted Non-derivative financial liabilities and assets held for managing liquidity risk The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows as of reporting date.

15 As at 31 December 2014 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Liabilities Deposits from banks 29,285 10,846 74, ,856 Due to customers 442, , ,561 3, ,210 1,258,603 Derivative financial instruments 3, ,221 Borrowed funds - - 2,344 67,896 74, ,792 Other liabilities - 51,104 8,934 1,617-61,655 Current income tax liabilities ,683-2,683 Deferred income tax liabilities ,989-6,989 Total liabilities (contractual maturity) 475, , ,564 82, ,762 1,592,799 Total assets Cash and balances with central banks 36, , ,256 Cash and balances with other banks 100, ,551 Loans and advances to customers 204,456 92,978 57, , , ,925 Trading assets - 52, ,472 Investment securities 36,854 59,558 18,482 49,507 30, ,717 Derivative financial instruments ,873 10, ,436 Pledged assets 14, ,173 4,174 38,488 20, ,733 Other assets - 1,228 29, ,679 Total assets (expected maturity dates) 393, , , , ,859 1,754,768 As at 31 December 2013 Liabilities Deposits from banks 38,745 23, ,200 Due to customers 997,682 98,904 24,820 2,273-1,123,679 Derivative financial instruments Borrowed funds - - 1,677 57,603-59,280 Other liabilities 11, ,702 11,558-65,344 Current income tax liabilities ,734-1,734 Total liabilities (contractual maturity) 1,048, ,477 68,199 73,168-1,312,237 Total assets Cash and balances with central banks 78, , ,341 Cash and balances with other banks 60,215 1, ,326 Loans and advances to customers 189, ,285 58, , , ,773 Trading assets - 5,125 13, ,114 Investment securities - available-for-sale 5,093 54,107 60, , ,840 Derivative financial instruments Pledged assets 70,146 59,557 25,861 22,057 12, ,074 Other assets , ,600 Total assets (expected maturity dates) 403, , , , ,652 1,460,068

16 The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by behavioral maturities at the reporting date. The amounts disclosed in the table are the behavioral undiscounted cash flows as of reporting date. As at 31 December 2014 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Liabilities Deposits from banks 29,285 10,846 74, ,856 Due to customers 329, , , ,636 70,549 1,258,603 Derivative financial instruments 3, ,221 Borrowed funds - - 2,344 67,896 74, ,792 Other liabilities - 51,930 8,958 1,617-62,505 Current income tax liabilities ,826-1,826 Deferred income tax liabilities ,989-6,989 Total liabilities (contractual maturity) 362, , , , ,101 1,592,792 Total assets Cash and balances with central banks 36, , ,256 Cash and balances with other banks 100, ,551 Loans and advances to customers 204,456 92,978 57, , , ,925 Trading assets - 24, ,104 Investment securities 36,854 59,558 18,482 58,460 52, ,473 Derivative financial instruments ,873 10, ,435 Pledged assets 14, ,173 4,174 38,488 20, ,733 Other assets - 12,899 30, ,186 Total assets (expected maturity dates) 393, , , , ,662 1,769,663 As at 31 December 2013 Liabilities Deposits from banks 38,745 23, ,200 Due to customers 343, ,601 97, , ,395 1,123,678 Derivative financial instruments Borrowed funds - - 1,677 57,603-59,280 Other liabilities 11, ,702 11,558-65,344 Current income tax liabilities ,743-1, Total liabilities (contractual maturity) 394, , , , ,395 1,312,246 Total assets Cash and balances with central banks 78, , ,341 Cash and balances with other banks 60,215 1, ,326 Loans and advances to customers 189, ,285 58, , , ,773 Trading assets - 5,125 13, ,114 Investment securities - available-for-sale 5,093 54,107 60, , ,840 Derivative financial instruments Pledged assets 70,146 59,557 25,861 22,057 12, ,074 Other assets , ,640 Total assets (expected maturity dates) 403, , , , ,652 1,460, Assets held for managing liquidity risk The Bank holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding in a stressed market environment. The Bank s assets held for managing liquidity risk comprises, amongst others: Cash and balances with central banks; Government bonds and other securities that are readily acceptable in repurchase agreements with central banks; and Secondary sources of liquidity in the form of highly liquid instruments in the Bank s trading portfolios.

17 3.3.6 Contingent liabilities and commitments (a) Loan commitments The dates of the contractual amounts of the Bank s contingent liabilities that it commits to extend credit to customers and other facilities (Note 38.2) are summarised in the table below. (b) Other financial facilities Other financial facilities (Note 38.2) are also included in the table below, based on the earliest contractual maturity date. (c) Capital commitments Capital commitments for the acquisition of buildings and equipment (Note 38.1) are summarised in the table below. As at 31 December 2014 Not later than 1 Year Over one year Total Guarantees, acceptances and other financial facilities 708, , ,316 Capital commitments 2,111-2, , , ,427 As at 31 December 2013 Not later than 1 Year Over one year Total Guarantees, acceptances and other financial facilities 335,292 71, ,286 Capital commitments 1,563-1, Fair value of financial instruments (a) Financial instruments not measured at fair value 336,855 71, ,849 The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank s statement of financial position at their fair value: Carrying value Fair Value Assets Loans and advances to banks 94,430 62,117 94,430 62,149 Loans and advances to customers 930, , , ,907 Liabilities Deposits from banks 111,200 61, ,200 60,175 Due to customers 1,251,015 1,118,401 1,251,015 1,124,835 Borrowed funds 146,653 58, ,653 59,280 (i) Loans and advances to bank Loans and advances to banks include inter-bank placements and items in the course of collection. The carrying amount of floating rate placements and overnight deposits is a reasonable approximation of fair value. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. (ii) Loans and advances to customers Loans and advances are net of charges for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. (iii) Investment securities The fair value for loans and receivables and held-to-maturity financial assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics.

18 Investment securities (available-for-sale) disclosed in the table above comprise only those equity securities held at cost less impairment. The fair value for these assets is based on estimations using market prices and earning multiples of quoted securities with similar characteristics. All other available-for-sale financial assets are already measured and carried at fair value. (iv) Deposits from banks and customers The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity. (v) Off-balance sheet financial instruments The estimated fair values of the off-balance sheet financial instruments are based on markets prices for similar facilities. When this information is not available, fair value is estimated using discounted cash flow analysis. (b) Fair value hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the group s market assumptions. These two types of inputs have created the following fail value hierarchy: Level 1 Level 1 - Quoted prices (adjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges. Level 2 Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is as prices) or indirectly (that is derived from prices). Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible.

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